What components make up the cost of capital, i.e., what factors are found in the WACC calculation?
10-2 Basic Definitions for WACC Calculations
Explain why the term ?(1-T)? is included in the WACC calculation.
10-2-1 Overview of Case: Coleman
A company currently plans a capital structure comprised of preferred stock with a weight of 30% and common stock with a weight of 40%. They also say that to achieve their target tax shield goal they need to have a weight of debt at 70%.
Comment on whether this is feasible and if not, why not?
10-3 Cost of Debt
Calculate the annual after-tax cost (in dollars) of debt given the following information:
The firm has 20,000 bonds issued, each with $1,000 par value. (Recall that the coupon interest paid is equal to the par value times the coupon rate.)
The coupon rate paid on the bonds is 5%. (This is the interest expense on the bonds.)
The corporate tax rate is 35%.
10-4 Cost of Preferred Stock
The cost of preferred stock is determined to be 5%. The price of the preferred stock was $54/share. What was the dividend per share paid out to a holder of this preferred stock?
10-5 Cost of Retained Earnings
What is the cost of keeping a portion of a firm?s earnings as retained earnings rather than paying the earnings out as a dividend?
10-5a CAPM Approach
Calculate the cost of equity financing given the following:
Risk-free rate: 1%
Market risk premium: 7%
Beta: 1.25
10-5b Bond-Yield-Plus-Risk-Premium Approach
The return on a bond is 4% while the return on common is 5%. What is the risk premium?
10-5c DCF Approach
Solve for required return given the following:
The dividend paid at the beginning of the first time period (D0) was $4/share. The dividend grows in perpetuity at 3.5% (growth rate g). The price of the stock (P0) is $39/share.
10-5d Averaging the Alternative Estimates
The average rate of return on a stock was calculated to be 18.4%. The DCF method yielded 21%, while the rd +RP method yielded 14%. What estimate did the CAPM yield?
10-6 Cost of New Common Stock
Can a firm expect capital from issuance of new shares to cost more or less than using retained earnings? Explain your answer.
10-7 Composite WACC
Calculate the WACC (report using x.x% format) given the follow information, assuming a tax rate of 30%:
wd: 20%
rd: 7%
wp: 20%
rp: 8%
wc: 60%
rs: 12%
10-9 Adjusting the Cost of Capital for Risk
What could be assumed about a company?s propensity for risk given a lower-than-industry-average WACC?
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