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XYZ Company’s target capital structure is 40% debt and 60% common equity. The XYZ doesn’t carry...

XYZ Company’s target capital structure is 40% debt and 60% common equity. The XYZ doesn’t carry any preferred stocks. Theafter-tax cost of debt is 6.00% and the cost of retained earnings is 10.25%. The cost of ne issuing stocks is 12%. XYZ currently has retained earning of 50,000 and needs an additional capital of $100,000. To maintain the same capital structure, What is its WACC?

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Answer #1

Total capital needed = 50000+ 100000 = 150000 ,out of which 150000*. 40 = 60000 will be financed by debt , and rest 150000-60000= 90000 will be financed from equity      [out of 90000 ,50000 from retained earning and 40000 from new equity ]

components cost Amount weights cost *weight
After tax debt 6 60000 60000/150000=.40 6*.40=2.4
Retained earning 10.25 50000 50000/150000= .3333 10.25*.3333=3.42
New stock 12 40000 40000/150000= .2667 12*.2667= 3.20
150000
WACC 9.02

WACC = 9.02%

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