Given the following information for XYZ Co., you want to find the cost of capita
ID: 2756692 • Letter: G
Question
Given the following information for XYZ Co., you want to find the cost of capital (WACC). The firm’s tax rate is 40%. Ignore all the flotation cost. Debt: 8,000 7% coupon bonds outstanding, $1,000 par value, 15 years to maturity, selling for 98% of par; the bonds make semiannual payments. Preferred stock: 20,000 shares of 7% preferred stock outstanding, $100 par value, currently Common Stock: selling for $90 per share. 300,000 shares outstanding, selling for $50 per share; the beta is 1.25. Currently, the market risk premium is 6%, and the risk-free rate is 3%.
What is the cost of debt?
What is the cost of preferred stock?
What is the cost of common stock?
Given the above information, what is the cost of capital?
Explanation / Answer
semiannual interest = 1000 *.07 *6/12 = 35
semiannual months = 15 *2 = 30
Yield = [Interest +(Face value -price) / months ]/[(Face value +price)/ 2]
= [ 35 + (1000 - 980) / 30 ] /[(1000+980)/2]
= [35 + (20/30] /[ 1980 /2]
= [35+ .6667] / 990
= 35 .6667 /990
= .0360 or 3.60% semiannually or (3.6*2) = 7.2%
After tax cost of debt = 7.2 (1 - .40 ) = 7.2 *.60 = 4.32%
cost of preferred stock =dividend /current price
= 7 / 90
= .0777 or 7.77%
cost of common stock = Rf +[Beta* Market risk premium ]
= 3 + [ 1.25 * 6 ]
= 3 + 7.5
= 10.5%
COst of capital = 8.33%
market value weight based on market value cost weight *cost After tax cost of debt 8000*980 = 7840000 7840000/24640000 = .32 4.32 1.382 Preferred stock 20000*90 = 1800000 1800000/24640000= .07 7.77 .544 common stock 300000*50 = 15000000 15000000/24640000= .61 10.5 6.405 24640000 WACC 8.33%Related Questions
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