1) XYZ’s CFO is considering whether to take on the new project that has average risk. He gathered the information given below:
i) Company has bonds outstanding which mature in 26 years with the annual coupon of 7.5%. The bonds have the face value of= $1,000 and sell in market today for $920. There are 10,000 bonds outstanding.
ii) Risk-free rate is 6%.
iii) Market risk premium is 5%.
iv) The stock’s beta is 1.2.
v) The company’s tax rate is 40%.
vi) The company has 50,000 shares of favoured stock with the par value of $100. These shares are presently trading at
$105 and pay the annual dividend of $5.40.
vii) Company also has 1,850,000 common shares trading at $25. These shares last paid the annual dividend of $0.93.
a) What is XYZ’s after-tax cost of debt?
b) What is XYZ’s cost of preferred equity?
c) What is XYZ’s Wd?
Requirements
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