XYZ, Inc. plans to expand its manufacturing facilities and start producing a new type of artificial...

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XYZ, Inc. plans to expand its manufacturing facilities and start producing a new type of artificial stone for outdoor patios. XYZ has a debt-to-value ratio of 0.3 and a pre-tax cost of debt of 8%. ABC, the sole firm producing this type of product now, has a pre-tax cost of debt of 6.5%, a debt-to-equity ratio of 0.4, and an equity beta of 1.2. Both firms have a 21% tax rate. The risk-free rate of return is 2.5% and the market rate of return is 12.5%. Compute ABC's cost of equity capital. (i) (ii) (iii) (iv) Compute the unlevered cost of capital for artificial stones firms. <12.58%> Compute XYZ's cost of equity capital. Compute XYZ's weighted average cost of capital. <11.79%> XYZ, Inc. plans to expand its manufacturing facilities and start producing a new type of artificial stone for outdoor patios. XYZ has a debt-to-value ratio of 0.3 and a pre-tax cost of debt of 8%. ABC, the sole firm producing this type of product now, has a pre-tax cost of debt of 6.5%, a debt-to-equity ratio of 0.4, and an equity beta of 1.2. Both firms have a 21% tax rate. The risk-free rate of return is 2.5% and the market rate of return is 12.5%. Compute ABC's cost of equity capital. (i) (ii) (iii) (iv) Compute the unlevered cost of capital for artificial stones firms. <12.58%> Compute XYZ's cost of equity capital. Compute XYZ's weighted average cost of capital. <11.79%>

Answer rating: 100% (QA)

To compute ABCs cost of equity capital we can use the capital asset pricing model CAPM formula The formula is as follows Cost of Equity RiskFree Rate ... View the full answer