Question

XYZ. is evaluating its cost of capital under alternative financing arrangements? In consultation with investment bankers, XYZ expects to be able to issue new debt at par with a coupon rate of 9% and to issue new preferred stock with a $3.50 per share dividend at $20 a share. The common stock of Gaggle is currently selling for $35 a share. XYZ expects to pay a dividend of $1.50 per share next year. Market analysts foresee a growth in dividends in Invest stock at a rate of 8% per year. XYZ marginal tax rate is 35%.

If XYZ raises capital using 45% debt, 5% preferred stock, and 50% common stock,
what is XYZ cost of capital?
If XYZ raises capital using 30% debt, 5% preferred stock, and 65% common stock,
what is XYZ cost of capital?

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Answer 1

Answer:

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