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Problem One XYZ Company needs to introduce a new product to the market and need a capital of 100,000$. XYZ can acquire its capital from
Problem One XYZ Company needs to introduce a new product to the market and need a capital of 100,000$. XYZ can acquire its capital from different sources: . . Borrow 20,000$ from the bank with an Interest rate of 10% Issue preferred stocks for 10,000$, each preferred stock price is 110$ and pays a dividend of 10$ Use 55,000$ from retained earnings, Knowing that the common stock of XYZ is currently trading for 135$, its expected dividend to be paid is 5$ and its earnings growth rate is 5%. Moreover its stock beta is 0.9, risk free in market is 5.5% and market risk premium is 6%. Issue new common stocks for 15,000$ with a floatation cost of 12%. Note: Taxes paid are 40% Required: a) Calculate the weight of each component of capital (weight of debt, weight of Preferred stocks, weight of retained earnings, and weight of new common stocks). b) Calculate the cost of each component of capital (after tax cost of debt, cost of Preferred stocks, Total cost of retained earnings using the average method, and cost of new common stocks). c) Calculate the Weighted average cost of capital
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