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Determine xyz inc cost of debt and market value of bonds

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Reference no: EM133001340

XYZ Inc. produces photographic equipment. Based on its balance sheet, it has 100,000 bonds with $100 par. Its bonds pay a semiannual coupon of 9.5% per year and have 4 years to maturity. The next coupon date is in 6 months. XYZ's bond is currently trading at par.

The levered beta of its common stock is 1.60. XYZ's also has retained earnings of 25million in its balance sheet.

XYZ has 5 million common shares outstanding and its common stick was sold at 4.5 dollar last year. The company pays semiannual dividends per share and the next dividend is due imdeatele at 40 cents per share. Its dividend will grow at a constant rate of 5% per semiannual period for the next five years. (I.e. XYZ pays dividend per share now, in six months, in one year... and in five years), and then will grow at constant rate of 2% semiannual period afterwards.

XYZ's management considers building a new plant. Management assumes that the beta of this project is equal to the company beta. The risk-free rate is 3% per year and the market return is 9% per year. The corporation tax rate is 30%.

a) Determine XYZ Inc's cost of debt and market value of bonds

b) Determine XYZ Inc's cost of equity

c) Determine XYZ Inc's market value of equity

d) Determine the after-tax annual discount rate for the plant

Reference no: EM133001340

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