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Weighted average cost of capital

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XYZ Company has a target capital structure of 60% common stock, 30% debt, and 10% preferred stock. The company wishes to issue new bond ($1,000 par value) with 10% coupon rate and 30 years to maturity. The flotation costs will be $20 and the bond has to be sold at 5% discount. To issue new preferred stock the company has to pay $2 as flotation cost. The market value of preferred stock is $8 and stock will pay $1 dividend. New common stocks will cost the company $2. The expected dividend is $3 and the market value is $19 and growth rate of 5%. Tax rate is 40%.

What is the weighted average cost of capital?

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Solution Summary

The solution explains how to calculate the weighted average cost of capital.

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Please see the attached file.

After tax cost 6.48%

Cost of proffered stock - Preferred stock is a perpetuity and the cost is calculated
as Annual ...

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