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b) A firm finances its projects with 45% common stock, 15% preferred stock, and 40% debt. The firm has a 34% marginal tax rate. The
b) A firm finances its projects with 45% common stock, 15% preferred stock, and 40% debt. The firm has a 34% marginal tax rate. The cost of equity is 9%, the cost of preferred is 8%, and the cost of debt is 7%. What is the WACC? c) XYZ Inc. has decided upon its target debt/equity ratio to be 0.6. The financial manager is calculating the cost of capital based on this target capital structure. If the company has a bond with 15 years td maturity, a semi-annual coupon rate of 6%, a par value of $1,000 and currently sells for 95% of par value. The company's stock beta is 2, the expected return on the market is 9%, and the risk-free rate is 3%. Calculate: 1) The company's cost of equity il) The company's after-tax cost of debt (if the tax rate is 35%) 1) The company's after-tax cost of debt (if the tax rate is 35%) I iii) The overall company's cost of capital (WACC) at the target debt/equity ratio of 0.6
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