Question 3 (30 marks) XYZ Ltd is a leading manufacturer in the automobile industry. To maintain its competitive edge, the company is considering investing in advanced robotic assembly technology. To fund this project, a total amount of new capital of $1,800,000 should be raised through this bond issuance. The following two kinds of new bonds will be issued. (1) To issue a 12-year bond with an annual coupon rate of 4% and a discounted price of 82%. The total market value of this coupon bond is $1,050,000. (2) To issue a new 4-year zero-coupon bond at a discount price of 85%. The total market value of this zero-coupon bond is $750,000. The company has recently distributed dividends of $0.18 per share to its shareholders. These dividends are projected to grow steadily at a fixed rate. XYZ' existing capital structure is made up of: Book value Market value $ Ordinary share (1,000,000 shares) 1,000,000 2,500,000 10% preference share ($2 par value) 800,000 2,000,000 8% perpetual bond 500,000 1,300,000 Other information: 1. All the existing 8% perpetual bond, new 4% coupon bond, and new zero-coupon bond have a par value of $1,000 each. 2. The applicable corporate tax rate is 15%. 3. XYZ's return on equity (ROE) stands at 20%, and it has a constant dividend payout ratio of 35%. Required: (a) Calculate the cost of capital of XYZ's: (i) ordinary share; (ii) preference share; (iii) perpetual bond; (iv) new coupon bond (Hint: By interpolation between 5% and 7%); (v) new zero-coupon bond. (22 marks) ( b ) Determine the weighted average cost of capital (WACC) of the company based on market value weightings after the new bonds are issued. (8 marks) (Total 30 marks) - End of Question Paper