The XYZ Co. has 10,000 bonds and 400,000 shares outstanding. The bonds have a 10% annual coupon, $1,000 face value, $1050 market value, and 10-year maturity. The beta of the stock is 1.30 and its price per share is $40. The riskless return is 6%, the expected market return is 14%, and XYZ ‘s tax rate is 40%.
a. What is the before-tax cost of debt financing?
b. What is the after-tax cost of equity financing?