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Suppose firm XYZ has the following balance sheet figures: ...

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Finance

Suppose firm XYZ has the following balance sheet figures:

Book value

Bonds: 8% coupon rate, annual coupons, 10 years to maturity

$1.0 million

Preferred shares: 10% dividend rate

$1.0 million

Common equity: common shares 100,000 shares issued at $15/share

$1.5 million

Retained earnings

$0.5 million

Total

$4.0 million

Assume the marginal tax rate is 40%. The market interest rate on similar risk 10-year bonds is 6%. Similar risk preferred shares are providing yields of 8%, and the common share price is currently $25.

(1) Find the market value proportions of bonds, preferred shares, and common equity in total asset value.

(2) Assume that the firm paid a dividend per share last year of $1, which is expected to grow at 5% per year indefinitely. What is the cost of common equity? What is the firms WACC?

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