Task1. XYZ, a Telecom Company, has the following capital structure, which is considered to be optimal:
Preferred stock 20%
Common equity 60%
Throughout this tax year, company is liable to pay tax @ 35%, and investors are expecting that earnings and dividends will grow at a stable rate of 10%.Current year’s dividend is Rs. Four per share and the common stocks are selling at Rs. 60per share.
XYZ can acquire new capital in the following manners:
Preferred stock: New preferred stock with a dividend of Rs. 15 can be sold to the public at a price of Rs. 97 per share.
Debentures: Debentures can be sold at an interest rate of 13%.
You are required to
• Find out the cost of each capital structure component
• Compute the weighted average cost of capital.