XYZ Co has 7000 units of bonds outstanding. Each unit has $100 face value, 7% coupon rate with semi-annual payments, and 20 years to maturity. The risk-free rate is 3%, default risk premium for its bond is 1%, maturity risk premium is 1.5%. XYZ has a tax rate of 20%.

XYZ Co has 20,000 shares of common stocks. The stock has a standard deviation of return of 20%. A stock market index has a standard deviation of return of 25%. The correlation coefficient between stock return and stock stock index return is 0.92. The stock is expected to pay dividend of $6 in one year and its expected price in one year is $80. The risk-free rate is 3%. The stock market index has an expected return of 12%.

1. Determine the before tax cost of debt, and the after tax cost of debt.

2. Determine the value of each unit of bond, and the total market value of all units of bonds.

3. Determine the beta of the stock, and the cost of equity of the stock using the capital asset pricing model.

4. Determine the value of each share of stock, and the total market value of all shares of stock.

5. Determine how much debt and how much equity (capital structure) the firm has using the total market vale of stocks and bonds. Determine the weighted average cost of capital. rd