QUESTION: Solve the weighted average cost of capital (WACC), showing all components.

Information:

XYZ, Inc. can sell bonds with a par value of $1,000 and a coupon rate of 8% per year, paid semi-annually. The bonds will have a maturity of 5 years. The current market price of similar bonds is $975. XYZ anticipates flotation costs of $20 per bond.

• XYZ, Inc. can sell preferred stock with the following characteristics: $100 par value, 5% annual dividend. The stock is currently selling for a price of $87.50 per share. XYZ anticipates flotation costs of $3 per share.

• XYZ, Inc. can sell common stock at a price is $150 per share. The stock last paid a semi-annual dividend of D₀ = $2.50 per share. The dividend is expected to grow at an annual rate of 8% for the foreseeable future. XYZ anticipates flotation costs of 10%.

• The company's tax rate is 40%.

2020 Balance Sheet (thousands)

cash 102

accounts payable 325

accounts receivable 400

notes payable 300

inventory 438

accruals 110

current assets 940

current liabilities 735

gross fixed assets 2391

long-term debt (bonds) 526

accum. depreciation 550

preferred stock 125

net fixed assets 1841

common stock 128

total assets 2781

paid-in capital 584

retained earnings 683

total common equity 1395

total liabilities and equity 2781