Question

# XYZ has a capital structure that is 35 % debt, 5 percent preferred stock, and 65...

XYZ has a capital structure that is 35 % debt, 5 percent preferred stock, and 65 %common stock. The pretax cost of debt is 8.25 %, the cost of preferred is 8%, and the cost of common stock is 117%. The tax rate is 36%. The company is considering a project that is equally as risky as the overall firm. This project has initial costs of \$550,000 and annual cash inflows of \$130,000, \$400,000, and \$550,000 over the next 3 years, respectively. What is XYZ's WACC? What is the projected net present value of this project?

where wd = weight of debt in capital structure

wp = weight of preferred stock in capital structure

we = weight of common stock in capital structure

rd = cost of debt

rp = cost of preferred stock

re = cost of common stock

t = tax rate

Putting all the values in above equation, we get

WACC = 0.35 * 8.25 % * ( 1 - 0.36) + 0.05 * 8% + 0.65 * 11.7 %

= 9.85 %

 Year Cash Flows 0 - \$ 550000 1 \$ 130000 2 \$ 400000 3 \$ 550000

= \$ 130000 / ( 1 + 0.0985) + \$ 400000 / ( 1 + 0.0985) + \$ 550000 / ( 1 + 0.0985) - \$ 550000

= \$ 314688