Home / Questions / What is the market interest rate on XYZ’s debt and its component cost of debt Coupon rate ...
)What is the market interest rate on XYZ’s debt and its component cost of debt?
Coupon rate 
12% 
Coupons per year 
2 
Years to maturity 
15 
Price 
$1,153.72 
Face value 
$1,000 
Tax rate 
40% 
Market Interest Rate =
Cost of Debt =
2. (12.5 Points)What is the firm’s cost of preferred stock?
Nominal dividend rate 
10% 
Dividends per year 
4 
Par value 
$100 
Price 
$111.10 
Cost of Preferred Stock =
3. (12.5 Points)What is XYZ’s estimated cost of common equity using the CAPM approach?
ß 
1.2 
r_{RF} 
7% 
RP_{M} 
6% 
Estimated Cost of Common Equity =
4. (12.5 Points)What is the estimated cost of common equity using the DCF approach?
Price 
$50 
Current dividend 
$4.19 
Constant growth rate 
5% 
Estimated Cost of Common Equity =
5. (12.5 Points)What is the bondyieldplusriskpremium estimate for XYZ’s cost of common equity?
"Bond yield + RP" premium 
4% 
market interest rate on XYZ’s debt 
10% 
Bondyieldplusriskpremium estimate =
6. (12.5 Points)What is your final estimate for r_{s}?
METHOD 
ESTIMATE 
CAPM 
14.20% 
DCF 
13.80% 
r_{d} + RP 
14.00% 
Estimate =
7. (12.5 points)XYZ estimates that if it issues new common stock, the flotation cost will be 15%. XYZ incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?
% Flotation cost 
15% 

Net proceeds after flotation 
$42.50 
Cost of Newly Issued Common Stock
8. (12.5 Points)What is XYZ’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.
w_{d} 
30% 
r_{d} (1 – T) 
6.00% 
w_{p} 
10% 
r_{p} 
9.00% 
w_{c} 
60% 
r_{s} 
14.00% 
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