Question

Company XYZ will pay in exactly one year 54 in dividends per share to its common stock shareholders. In exactly one year it will pay S2 in dividends per share to holders of its preferred stock. The flotation costs on a per share basis for common stock are 57 and for preferred stock are $2. Common stock dividends are expected to grow 5% each year-preferred stock dividends will not change. The company can issue $1,000-par-value, 12% coupon, ten-year bonds that can be sold for $950 each. Flotation costs for each bond equal $30. The current per share prices for common stock and preferred stock are $19 and 511, respectively. The company's tax rate is 40%. The company's target capital structure is 70% retained earnings, 20% new preferred stock issues, and 10% new debt (bonds). What is the WACC (.)? Select one: a 23.49% O b. 25.49% O c. 27.49% O d. 29.49% In the determination of r, which has a stronger theoretical foundation? Select one: O a Constant Growth Model ob CAPM O cZero Growth Model Od A and C A and B

Answer 1

t o Salution Po * Cost of Equity (ke) = Di tg (Retained Earnings) Where, si= Dundend payable (expected) so = Netproceeds. g = growth rate Ke = /26.05% = +0.05 $4 19 0 * Cost of reference stock RtNR x100 Dividend Net Proceeds Kp = 2 x 100 = 22.22%). 11 - 2 * Cost of seat (kd) = I (1-t) + R-NP so 100 R+ NP where, I = t = R = NP = n = Interest Amount tax rate Redemption price Net proceeds No. of years

120 (1-0.4) + 1000 - 920 Yo/30 10 0 +420 8.33% * WACC = We x ke + Wd xkd + Wp x Kp. Wet ud twe 0x7 x 28.05 +0.2 x 22-22 tool x 8.33 0-7 ton2 toy = [23.49 %] @ Ans CAPM and Constant Cnauth Model

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