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XYZ Inc. just paid a dividend of $2.50 per share on 100,000shares outstanding. Dividends are expected to grow at a constantrate indefinitely. The firm’s ROE is 12 percent, beta is 1.2 andthe dividend payout ratio is 45 percent. Treasury notes areyielding 2.75 percent and the market risk premium is estimated at7.25 percent. The firm has 50,000 bonds outstanding that willmature in 5 years. The bonds are quoted at 107 percent of par andpay a 6.2 percent semi-annual coupon. The firm’s tax rate is 27percent. What is the change in the firm’s WACC if it sells 25,00010-year zero coupon bonds ($1,000 par value) with an 8.3 percentmarket required rate of return? Assume semi-annual compounding forthe zero-coupon bonds.
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