Cost of Capital

Paper details:

Cost of Capital
Please answer question for calculations and provide brief summary of what calculation is used for in financial industry.
Please answer question for calculations and provide brief summary of what calculation is used for in financial industry
Review the questions below and use the data provided in the question to solve the calculation

1. A. What is the market interest rate on XYZ’s debt and its component cost of debt?
Coupon rate 12%
Coupons per year 2
Years to maturity 15
Price $1,153.72
Face value $1,000
Tax rate 40%

Market Interest Rate =
Cost of Debt =

1 B. What is the firm’s cost of preferred stock?
Nominal dividend rate 10%
Dividends per year 4
Par value $100
Price $111.10

Cost of Preferred Stock =

2 A. What is XYZ’s estimated cost of common equity using the CAPM approach?
ß 1.2
rRF 7%
RPM 6%

Estimated Cost of Common Equity =

2 B. What is the estimated cost of common equity using the DCF approach?
Price $50
Current dividend $4.19
Constant growth rate 5%

Estimated Cost of Common Equity =

3. A. What is the bond-yield-plus-risk-premium estimate for XYZ’s cost of common equity?
“Bond yield + RP” premium 4%
market interest rate on XYZ’s debt 10%

Bond-yield-plus-risk-premium estimate =

3 B. What is your final estimate for rs?
METHOD ESTIMATE
CAPM 14.20%
DCF 13.80%
rd + RP 14.00%

Estimate =

4 A. XYZ estimates that if it issues new common stock, the flotation cost will be 15%. XYZ incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?
% Flotation cost 15%
Net proceeds after flotation $42.50

Cost of Newly Issued Common Stock

4 B. What is XYZ’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.
wd 30% rd (1 – T) 6.00%
wp 10% rp 9.00%
wc 60% rs 14.00%

Cost of Capital

Paper details:

Cost of Capital
Please answer question for calculations and provide brief summary of what calculation is used for in financial industry.
Please answer question for calculations and provide brief summary of what calculation is used for in financial industry
Review the questions below and use the data provided in the question to solve the calculation

1. A. What is the market interest rate on XYZ’s debt and its component cost of debt?
Coupon rate 12%
Coupons per year 2
Years to maturity 15
Price $1,153.72
Face value $1,000
Tax rate 40%

Market Interest Rate =
Cost of Debt =

1 B. What is the firm’s cost of preferred stock?
Nominal dividend rate 10%
Dividends per year 4
Par value $100
Price $111.10

Cost of Preferred Stock =

2 A. What is XYZ’s estimated cost of common equity using the CAPM approach?
ß 1.2
rRF 7%
RPM 6%

Estimated Cost of Common Equity =

2 B. What is the estimated cost of common equity using the DCF approach?
Price $50
Current dividend $4.19
Constant growth rate 5%

Estimated Cost of Common Equity =

3. A. What is the bond-yield-plus-risk-premium estimate for XYZ’s cost of common equity?
“Bond yield + RP” premium 4%
market interest rate on XYZ’s debt 10%

Bond-yield-plus-risk-premium estimate =

3 B. What is your final estimate for rs?
METHOD ESTIMATE
CAPM 14.20%
DCF 13.80%
rd + RP 14.00%

Estimate =

4 A. XYZ estimates that if it issues new common stock, the flotation cost will be 15%. XYZ incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?
% Flotation cost 15%
Net proceeds after flotation $42.50

Cost of Newly Issued Common Stock

4 B. What is XYZ’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.
wd 30% rd (1 – T) 6.00%
wp 10% rp 9.00%
wc 60% rs 14.00%

write at least 500 words that respond to the following questions with your thoughts, ideas, and comments. Be substantive and clear, and use examples to reinforce your ideas.

1. In the weighted average cost of capital formula, the after-tax cost of debt is used instead of the before-tax cost of debt. However, no such adjustment is made to the cost of equity. Are you surprised by this different tax handling of debt versus equity? Why or why not?
2. If a corporation borrowed all of the money for its project at the risk-free rate, does that mean that the project’s cost of capital is the risk-free rate?
3. When calculating the weighted average cost of capital, would it matter more if book values instead of market values were used for equity instead of debt? Please explain.

 

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