1. Assume the following capital structure for XYZ Company:

Debt 35%

PFD 15%

Common 50%

The following facts are also provided:

Bond yield to maturity 9%

Corporate tax rate 35%

Dividend on PFD stock $8.50

Price of PFD stock $100

Float cost on PFD stock $2.00

Dividend on common stock $1.20

Price of common stock $30.00

Growth rate, common stock 9%

1 Compute the WACC.

2.IF there is $30 million in retained earnings, at what dollar value will the marginal cost of capital go up? If the float cost on common stock is $1.50, what will be the cost of new common stock?

CLUE: the marginal cost of capital will go up when there is no longer enough retained earnings to support the capital structure.