The balance sheet of XYX Corporation is shown below.

Assets

(USD)

Total Liabilities and Equity

(USD)

Accounts Payable

3,000,000

Bond

6,000,000

Preferred Stock

3,000,000

Common Stock and Retained Earnings

7,000,000

Total Assets

19,000,000

Total Liabilities and Equity

19,000,000

You are given the following information:

Expected growth rate of common stock dividends is 5%

XYZ's new bonds will have 20-year maturity, a coupon rate of 4% (semiannual coupon payment), and face value of $1,000.Net proceeds from new bonds will be $964.22 per bond.The currently outstanding bond was issued at par and is now selling for $975.

The common stock of XYZ is selling for $40.00 per share in the market.New common flotation cost will be 6%.

Company recently paid a common stock dividend of $2.50 per share, and 300,000 shares are outstanding.

New preferred stock with a dividend of $7.50 per share will be sold to net $85 per share.XYZ's current preferred stock is selling in the market at $85.50 per share, and 30,000 shares are outstanding.

Corporate tax rate is 25%.

The company needs to expand assets by $10 million in the coming year.Addition to retained earnings for the year will be $3 million.The company wishes to maintain the present capital structure based on market values.

Note: some answers are rounded.

What is the after-tax average cost of equity for new financing by XYZ Corporation?

A.5.63%

B.11.26%

C.5.90%

D.12.98%

E.14.45%

F.11.77%