Reference no: EM132743647

Problem 1: What is the weighted average cost of capital (WACC)? Using the information provided below. Show all components.

• XYZ company can sell bonds with a par value of $1,000 and a coupon rate of 8% per year, paid semi-annually. The bonds will have a maturity of 5 years. The current market price of similar bonds is $975. XYZ anticipates flotation costs of $20 per bond.

• XYZ can sell preferred stock with the following characteristics: $100 par value, 5% annual dividend. The stock is currently selling for a price of $87.50 per share. XYZ anticipates flotation costs of $3 per share.

• XYZ can sell common stock at a price is $150 per share. The stock last paid a semi-annual dividend of D0 = $2.50 per share. The dividend is expected to grow at an annual rate of 8% for the foreseeable future, or a very long time. XYZ anticipates flotation costs of 10%.

• The company's tax rate is 40%.

2020 Balance Sheet (thousands of dollars)

cash 102
accounts payable 325
accounts receivable 400
notes payable 300
inventory 438
accruals 110
current assets 940
current liabilities 735
gross fixed assets 2391
long-term debt (bonds) 526
accum. depreciation. 550
preferred stock 125
net fixed assets 1841
common stock 128
total assets 2781
paid-in capital 584
retained earnings 683
total common equity 1395
total liabilities and equity 2781