Question

XYC Inc. has 5 million shares of common stock outstanding. The current share price is $40....

  1. XYC Inc. has 5 million shares of common stock outstanding. The current share price is $40. The company also has one bond issue outstanding and the bond market value is $300 million. The yield to maturity of this bond is 8%. For the common stock, the most recent dividend was $2 and the dividend growth rate is 8 percent. Assume that the tax rate is 30 percent.
  1. What is the cost of common stock? (5 points)
  2. What is the after-tax cost of debt? (5 points)
  3. What are the weights of common stock and debt? (5 points)
  4. What is the weighted average cost of capital? (5 points)
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Answer #1

a) Cost of common stock is 13 %

b) Cost of debt is $ 168000000

c) Weight of common stock is 0.4 and weight of debt is 0.6

d) Weighted average cost of capital is 8.56%

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