1. (9 points) XYZ Co is considering a major expansion program that has been proposed by the companys information technology group. Before proceeding with the expansion, the company must estimate its weighted average cost of capital. You are an assistant to the CFO of the company and your first task is to estimate XYZ Cos cost of capital. The CFO has provided you with the following data, which he believes may be relevant to your task (all the market data are current). The firms tax rate is 40%. The market data on XYZ Cos securities is:

Debt

• 50,000 6% coupon bonds outstanding (bond A), with 25 years to maturity selling at $950; the bonds par value is $1,000 and they make semiannual payments.
• 60,000 5.5% coupon bonds outstanding (bond B), with 20 years to maturity selling at $1000; the bonds par value is $1,000 and they make semiannual payments.

Common stock

• 1,250,000 outstanding shares, selling for $95 per share; XYZ Co just paid a dividend of $5 per share and is expected to increase its future dividends at a constant rate of 6%.

Answer the following questions and SHOW ALL FORMULAS AND CALCULATIONS (if using a financial calculator show all the entries).

a. (4 points) What is XYZ Cos cost of debt?

b. (2 points) What is XYZ Cos cost of equity?

c. (3 points) What is XYZ Cos cost of capital?