•XYZ corp. currently has 50 million shares of common stock outstanding. Their cu
ID: 2769497 • Letter: #
Question
•XYZ corp. currently has 50 million shares of common stock outstanding. Their current market price is $80 per share and have a beta of 1.15. XYZ has $1 billion of bonds outstanding, each with the market value of $1100. It is known that the yield to maturity of the bond is 7.85%. XYZ also has 100 million shares of preferred stock outstanding which pay a dividend of $3 annually. The preferred shares are currently trading at $27 a share. The expected return on the S&P 500 is 14% and TBills are yielding 5%. The corporate tax rate is 40%. What is XYZ’s WACC?
Explanation / Answer
Cost of equity = risk free rate + Beta*( expected S&P 500- tbill rate)
= 5% + 1.15*(14% -3%)
=17.65%
Cost of prefers shares = 3/27 =11.11%
Cost of debt = TM*(1-t) =7.85%*(1-.4) =4.71%
In MN Market Value of prefernce shares 2700 11.11% Market value ofEquity 4000 17.65% Market value of Debt 1100000 5% 4.77%Related Questions
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