XYZ Co has 1000 units of bonds outstanding. Each unit has $100 face value, 7% coupon rate with semi-annual payments, and 10 years to maturity. The risk-free rate is 3%, default risk premium is 2%, maturity risk premium for 10-year maturity is 1 %. XYZ is in the 25% tax bracket.

You MUST label all your answers with numbers and alphabets such as 1.a, 1.b, 1.c, etc.

1. (a) Determine the required rate of return for its bonds, (b) the amount of tax savings, and (c) the after tax cost of debt.

2. Determine (a) the value of coupon payments, (b) the value of principal payment, and (c) total value of per unit of bond. (d) Determine total market value of all bonds outstanding.

XYZ Co has 12,000 shares of common stocks. The stock has a standard deviation of return of 20%% and the stock index has a standard deviation of return of 15%. The correlation coefficient between stock return and stock index return is 0.56. The stock is expected to pay dividend of $2 in one year, $2 in two years, $2 in three years. Its expected price in three years is $72. The risk-free rate is 3%. The stock market index has an expected return of 12%.

You MUST label all your answers with numbers and alphabets such as 3.a, 3.b, etc.

3. (a) Estimate the undiversifiable risk of XYZ stock. (b) Determine beta of XYZ stock.

4. Use the security market line or the capital asset pricing model to determine (a) the risk premium for stock XYZ. and (b) the required rate of return of the stock.

5. Determine (a) the per share value of the stock and (b) the total market value of all stocks.

Using information from all above for the following questions.

You MUST label all your answers with numbers and alphabets such as 6.a, 6.b, , etc

. 6. (a) How much debt relative to total value of debt and equity combined does XYZ have? (b) How much equity relative to total value of debt and equity combined does XYZ have?

7. (a) Determine the weighted average cost of capital of XYZ.