XYZ Inc. just paid a dividend of $2.50 per share on 100,000 shares outstanding. Dividends are...

XYZ Inc. just paid a dividend of $2.50 per share on 100,000 shares outstanding. Dividends are expected to grow at a constant rate indefinitely. The firm’s ROE is 12 percent, beta is 1.2 and the dividend payout ratio is 45 percent. Treasury notes are yielding 2.75 percent and the market risk premium is estimated at 7.25 percent. The firm has 50,000 bonds outstanding that will mature in 5 years. The bonds are quoted at 107 percent of par and pay a 6.2 percent semi-annual coupon. The firm’s tax rate is 27 percent. What is the change in the firm’s WACC if it sells 25,000 10-year zero coupon bonds ($1,000 par value) with an 8.3 percent market required rate of return? Assume semi-annual compounding for the zero-coupon bonds.

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jeff jeffy answered 1 year ago

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