XYZ Corporation is considering an expansion of their manufacturing facility. The

Question

XYZ Corporation is considering an expansion of their manufacturing facility. They need to raise $1,000,000.00 for the expansion. You need to determine the cost of capital for the million dollars. They can borrow 35% from a bank at an APR of 7.3%. They can also issue treasury stock at an estimated rate of 9.5%, this will account for 35% of funds that need to be expected rate of 10.5%. XYZ Corporation’s tax rate is 35%.

A. Please calculate the cost of capital for the XYZ Corporation.

B. If the XYZ Corporation can only borrow 25% from a bank, and they must split the rest between the two other sources, please calculate the new cost of capital.

Please show work

Explanation / Answer

Question is incomplete. Third source of capital is not clearly mentioned. Hence answer will be assumption based.

A. Debt proportion: 35%

Treasury stock proportion: 35%

Third source proportion: 30%

WACC, or Ko = Proportionate equity x Ke + Proportionate debt x Kd

Therefore, WACC of XYZ for this project will be,

0.35 x 9.5% + 0.35 x 7.3(1-0.35) + 0.30 x 10.5%

= 3.325+1.661+3.15

= 8.14%

B. New WACC with change of proportion,

0.375 x 9.5% + 0.25 x 7.3(1-0.35) + 0.375 x 10.5%

= 3.5625+1.18625+3.9375

= 8.69%

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