XYZ corp. currently has 50 million shares of common stock outstanding. Their cur
ID: 2769826 • Letter: X
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? Show all work!
Explanation / Answer
Weighted average cost of capital = 6.4%
Workings:
Specific cost of common stock (CAPM) = 0.05 + 1.15 ( 0.14 -0.05) = 0.1535
Specific cost of debt = yield to maturity x ( 1-t) = 0.0785 x ( 1- 0.40) = 0.0471
Source of capital Market value Market value weights Specific cost of capital Weighted cost of capital Common stock 4,000 0.2649 0.1535 0.0407 Preferred stock 10,000 0.6623 0.03 0.0199 Debt 1,100 0.0728 0.0471 0.0034 15,100 1.0000 0.064Related Questions
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