Limited has a target capital structure of 45% debt, 15% preferred stock and 40% common equity. The firm issued 2,000 semi-annual bonds, each at $1 200 with a coupon rate of 15%, a maturity period of 10 years and a par value of $1 000. The firm’s preferred stock pays a dividend of $15 per share and currently sells for $105 per share. However, the net proceeds to the firm from the sale of new preferred stock is only $90 per share. XYZAB Limited’s common stock currently sells for $55 per share and the firm recently paid a dividend of $5 per share on its common stock and the dividend is expected to grow indefinitely at a constant rate of 5% per annum. The firm has a tax rate of 30%. a) What is the firm’s after-tax cost of debt? b) What is the firm’s cost of newly issued preferred stock? c) What is the firm’s cost of common stock
XYZAB Limited has a target capital structure of 45% debt, 15%
a) What is the firm’s after-tax cost of debt?
b) What is the firm’s cost of newly issued preferred stock?
c) What is the firm’s cost of common stock?
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d) Calculate the firm’s weighted average cost of capital (WACC)
e) XYZAB Limited has a Research and Development division operating independently to produce cutting-edge products. This division has its own target capital structure of 30% debt and 70% equity as well as a beta of 1.5 and cost of debt of 14%. Given a market risk premium of 8%, a risk-free rate of 6%, what WACC should the division use to discount its cashflows?
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