XYZ Inc. has decided upon its target debt/equity ratio to be 0.6. The financial manager is...

 

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XYZ Inc. has decided upon its target debt/equity ratio to be 0.6. The financial manager is calculating the cost of capital based on this target capital structure. If the company has a bond with 15 years to maturity, a semi-annual coupon rate of 6%, a par value of $1,000 and currently sells for 95% of par value. The company's stock beta is 2, the expected return on the market is 9%, and the risk-free rate is 3%. Calculate: i) The company's cost of equity ii) The company's after-tax cost of debt (if the tax rate is 35%) iii) The overall company's cost of capital (WACC) at the target debt/equity ratio of 0.6. XYZ Inc. has decided upon its target debt/equity ratio to be 0.6. The financial manager is calculating the cost of capital based on this target capital structure. If the company has a bond with 15 years to maturity, a semi-annual coupon rate of 6%, a par value of $1,000 and currently sells for 95% of par value. The company's stock beta is 2, the expected return on the market is 9%, and the risk-free rate is 3%. Calculate: i) The company's cost of equity ii) The company's after-tax cost of debt (if the tax rate is 35%) iii) The overall company's cost of capital (WACC) at the target debt/equity ratio of 0.6.

Answer rating: 100% (QA)

i Cost of equity Cost of equity Riskfree rate Beta Expected market return R... View the full answer