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You have been hired as a consultant by XYZ Corporation, a
major producer of canned goods, to estimate the firm’s weighted average cost of
capital. XYZ Corporation has 500 million shares of common stock outstanding, 75
million shares of preferred stock outstanding, and 25 million 11% semiannual
coupon bonds outstanding, par value $1,000 each. The common stock currently
sells for $40 per share and has a beta of 1.2, the preferred stock currently
sells for $75 per share and pays an annual dividend of $7 per share, and the
bonds have 15 years to maturity and sell for 93.5 percent of par. The market
risk premium is 6%, the yield on Treasury bills is 4%, and Bluefield’s tax rate
is 35%. What is the company’s weighted average cost of capital?
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