Xyz estimates that if it issues new common stock the

Question

Cost of Capital Worksheet

1. What is the market interest rate on XYZ's debt and its component cost of debt?

Coupon rate	12%
Coupons per year	2
Years to maturity	15
Price	$1,153.72
Face value	$1,000
Tax rate	40%

 

 

 

 

2. What is the firm's cost of preferred stock?

Nominal dividend rate	10%
Dividends per year	4
Par value	$100
Price	$111.10

3. What is XYZ's estimated cost of common equity using the CAPM approach?

β	1.2
rRF	7%
RPM	6%

4. What is the estimated cost of common equity using the DCF approach?

Price	$50
Current dividend	$4.19
Constant growth rate	5%

5. What is the bond-yield-plus-risk-premium estimate for XYZ's cost of common equity?

"Bond yield + RP" premium	4%
market interest rate onXYZ's debt	10%

6. What is your final estimate for r_s?

METHOD	ESTIMATE
CAPM	14.20%
DCF	13.80%
rd + RP	14.00%

7. XYZ estimates that if it issues new common stock, the flotation cost will be 15%. XYZ incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?

% Flotation cost	15%
Net proceeds after flotation		$42.50

8. What is XYZ's overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.

wd	30%	rd (1-T)	6.00%
wp	10%	rp	9.00%
wc	60%	rs	14.00%