Using the following information for RZX Corp. and the general economy, compute the weighted average cost...

50.1K

Verified Solution

Question

Finance

Using the following information for RZX Corp. and the generaleconomy, compute the weighted average cost of capital for RZXCorp:
– The YTM on 20-year U.S. Treasury bonds is 3.5%. The marketrisk premium is 5.5%.
– RZX has 6.75% coupon bonds that were issued five years ago,mature in 20 years,
make semiannual interest payments, and currently sell for$1,036.60.
– The current price of the firm’s 6.80%, $100.00 par value,quarterly dividend, perpetual
preferred stock is $104.50.
– RZX’s common stock is currently selling for $40 per share. Itjust paid a $2.95 dividend, and
these dividends are expected to grow at a constant annual rateof 6% in the foreseeable future. Assume the risk-free rate is 7%and the market risk premium is 6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of5%.
– RZX common stock has a beta of 1.25.
- RZX has a marginal corporate tax rate of 35%
– The firm’s CFO suggests that its target capital structure is15% debt, 5% preferred stock, and 60% equity.
1. Using WACC compute the weighted average cost of capital.
2. What is the after tax cost of debt for RZX.
3. What is the cost of equity for RZX Corp? Use CCAP and WACC.Assumer the equity risk premium is 4.5%

Answer & Explanation Solved by verified expert

4.2 Ratings (555 Votes)

STEPS TO ESTIMATE WEIGHTED AVERAGE COST OF CAPITAL STEP1 Bonds Calculated cost of Bond by determining Yield To MaturityYTM and taking into account tax shield on interest Calculate total Market Value of bond STEP2 PREFERENCE SHARES Calculated cost of Preference shares from dividend payments required Calculate total Market Value of Preference shares STEP3 COMMON STOCK Calculated cost of commonstock by See Answer

Get Answers to Unlimited Questions

Join us to gain access to millions of questions and expert answers. Enjoy exclusive benefits tailored just for you!

Membership Benefits:

Unlimited Question Access with detailed Answers
Zin AI - 3 Million Words
10 Dall-E 3 Images
20 Plot Generations
Conversation with Dialogue Memory
No Ads, Ever!
Access to Our Best AI Platform: Flex AI - Your personal assistant for all your inquiries!

Become a Member

Transcribed Image Text

Using the following information for RZX Corp. and the generaleconomy, compute the weighted average cost of capital for RZXCorp:– The YTM on 20-year U.S. Treasury bonds is 3.5%. The marketrisk premium is 5.5%.– RZX has 6.75% coupon bonds that were issued five years ago,mature in 20 years,make semiannual interest payments, and currently sell for$1,036.60.– The current price of the firm’s 6.80%, $100.00 par value,quarterly dividend, perpetualpreferred stock is $104.50.– RZX’s common stock is currently selling for $40 per share. Itjust paid a $2.95 dividend, andthese dividends are expected to grow at a constant annual rateof 6% in the foreseeable future. Assume the risk-free rate is 7%and the market risk premium is 6%. For the bond-yield-plus-risk-premium approach, the firm uses a risk premium of5%.– RZX common stock has a beta of 1.25.- RZX has a marginal corporate tax rate of 35%– The firm’s CFO suggests that its target capital structure is15% debt, 5% preferred stock, and 60% equity.1. Using WACC compute the weighted average cost of capital.2. What is the after tax cost of debt for RZX.3. What is the cost of equity for RZX Corp? Use CCAP and WACC.Assumer the equity risk premium is 4.5%