Reference no: EM131750216

Question: The XYZ Corporation intends to finance new investments in proportions of 40% debt, 20% preferred shares, and 40% equity that will come solely from retained earnings. The corporate tax rate is 40 percent. Debt with a maturity of 12 years can be sold at face value at an interest rate of 14 percent. Preferred shares would be sold at par with after-tax issue costs amounting to 1 percent of par value. The dividend yield to investors would be 10 percent. New common shares could be sold at 15 percent below the current market price of $20 per share. Additional after-tax issuing expenses amount to $0.50 per share. Growth in dividends has been steady at 8 percent per year and it is assumed that this will continue. The dividend at the end of the current year is expected to be $2.25 per share. What is the firm's weighted average cost of capital?