Question

XYZ Company is considering a new project which has the same risk level as its current business. The new project has an initial cash outlay of $40,000 and projected cash inflows of $15,000 in year one, $10,000 in year two, and $10,000 in year three. XYZ Corporation has 16 million shares of common stocks, 1.2 million shares of preferred stocks and 0.3 million units of bonds outstanding. The bond has 2 years to maturity. Each bond sells for $1,000 (same as its face value) per unit and pays coupons at 6 percent annually. The common stock currently sells for $40 per share and has a beta of 1.5. The preferred stock sells for $50 and pays $5 dividend per share. The market risk premium is 10 percent and the risk-free rate is 5 percent. The corporation tax rate is 20 percent.

What is the WACC of XYZ Company?

Answer 1

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ºvo a 1x 2 ENG - 23:59 11-05-2020 AZ98 AT - AY - AZ BA BB BC BD AU AV AW COST OF DEBT = AFTER TAX COST OF DEBT = AX 6.00% 4.80% [6%*(1-0.20)] COST OF PREFERRED STOCK = DIVIDEND /PRICE 10.00% [5/50] 102 COST OF PREFERRED STOCK = 103 104 105 COST OF EQUITY = COST OF EQUITY = COST OF EQUITY = Rf + beta(Rm-Rf) 5% + 1.5(10%) 20.00% 106 108 109 110 111 MARKET VALUE PREFERRED STOCK BOND 1.2 X 50 0.3 X 1000 16 X 40 300 COMMON STOCK 640 1000 112 113 114 WACC SOURCE AMOUNT WEIGHT 115 116 A B WEIGHTED COC(%) COST A*B 10.00% 0.60% 4.80% 1.44% 20.00% 12.80% 117 PREFERRED STOCK BOND 118 119 60 300 640 1000 0.0600 0.3000 0.6400 COMMON STOCK 120 121 WACC = LEASING PORTFOLOQ 14.84% YIELD bond portfolio ... CoNvexity DGM beta VAR port future INDEX HEDGE INTL CAP BUD SANDRINE DIR right clean WACC ... +