AZO's Balance Sheet: (Millions of Dollars)
Cash		$10		Accounts payable		$10
Accounts receivable		20		Long-term debt		45
Inventories		20		Common equity
Current assets		$50		Common stock		$20
Net fixed assets		55		Retained earnings		30
				Total common equity		$50
Total assets		$105		Total liabilities and equity		$105
(1) The firm's tax rate is 40%.
(2) The current price of AZO's 10% coupon, semiannual payment, noncallable bonds with 20 years remaining to maturity is $980. AZO does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost.
(3) AZO has 4 million shares of common stock outstanding. P0 = $25. AZO's common stock has a beta of 1.3, the yield on T-bonds is 3%, and the market risk premium is estimated to be 8%.
a. What is AZO's cost of debt (before-tax)? What is the component cost of this debt for WACC purposes?
b. AZO doesnt plan to issue new shares of common stock. Using the CAPM approach, what is its estimated cost of equity?
c. What are the market value weights for long-term debt and common stock in AZO' capital structure? Keep two decimal places.
d. What is AZO's weighted average cost of capital (WACC)?