Final answer:
The Weighted Average Cost of Capital (WACC) is calculated using the proportion of a company's financing from equity and debt, along with their respective costs. For Corporation XYZ, the WACC is 10.8%.
Step-by-step explanation:
The Weighted Average Cost of Capital (WACC) is a calculation used to determine the average cost of financing a company's operations by considering both the cost of equity and the cost of debt. In order to calculate XYZ's WACC, we need to determine the proportion of the company's financing that comes from equity and debt.
To calculate the weight of equity, divide the market value of equity by the sum of the market value of equity and the market value of debt, then multiply by 100%. In this case, the weight of equity is (21 million / (21 million + 14 million)) * 100% = 60%.
To calculate the weight of debt, divide the market value of debt by the sum of the market value of equity and the market value of debt, then multiply by 100%. In this case, the weight of debt is (14 million / (21 million + 14 million)) * 100% = 40%.
Next, we need to calculate the cost of equity using the Capital Asset Pricing Model (CAPM). The CAPM formula is as follows: Cost of Equity = Risk-Free Rate + Beta * (Market Expected Return - Risk-Free Rate).
Using the given information, the cost of equity for XYZ is 5% + 2.2 * (10% - 5%) = 5% + 2.2 * 5% = 5% + 11% = <<5+2.2*5=16>>16%.
Finally, we can calculate XYZ's WACC by multiplying the weight of equity by the cost of equity and adding it to the weight of debt multiplied by the cost of debt after tax. The formula is as follows: WACC = (Weight of Equity * Cost of Equity) + (Weight of Debt * Cost of Debt * (1 - Corporate Income Tax Rate)).
Using the given information, XYZ's WACC is (60% * 16%) + (40% * 8% * (1 - 25%)) = 9.6% + 1.2% = 10.8%.