\nWhat components make up the cost of capital, i.e., what factors are found in the WACC calculation?<\/p>\n
10-2 Basic Definitions for WACC Calculations<\/p>\n
Explain why the term ?(1-T)? is included in the WACC calculation.<\/p>\n
\n10-2-1 Overview of Case: Coleman<\/p>\n
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%.<\/p>\n
Comment on whether this is feasible and if not, why not?<\/p>\n
10-3 Cost of Debt<\/p>\n
Calculate the annual after-tax cost (in dollars) of debt given the following information:<\/p>\n
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.)
\nThe coupon rate paid on the bonds is 5%. (This is the interest expense on the bonds.)
\nThe corporate tax rate is 35%.<\/p>\n
10-4 Cost of Preferred Stock<\/p>\n
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?<\/p>\n
10-5 Cost of Retained Earnings<\/p>\n
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?<\/p>\n
10-5a CAPM Approach<\/p>\n
Calculate the cost of equity financing given the following:<\/p>\n
Risk-free rate:\t1%
\nMarket risk premium:\t7%
\nBeta:\t1.25<\/p>\n
10-5b Bond-Yield-Plus-Risk-Premium Approach<\/p>\n
The return on a bond is 4% while the return on common is 5%. What is the risk premium?<\/p>\n
10-5c DCF Approach<\/p>\n
Solve for required return given the following:<\/p>\n
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.<\/p>\n
10-5d Averaging the Alternative Estimates<\/p>\n
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?<\/p>\n
10-6 Cost of New Common Stock<\/p>\n
Can a firm expect capital from issuance of new shares to cost more or less than using retained earnings? Explain your answer.<\/p>\n
10-7 Composite WACC<\/p>\n
Calculate the WACC (report using x.x% format) given the follow information, assuming a tax rate of 30%:<\/p>\n
wd:\t\t20%
\nrd:\t\t7%<\/p>\n
wp:\t\t20%
\nrp:\t\t8%<\/p>\n
wc:\t\t60%
\nrs:\t\t12%<\/p>\n
10-9 Adjusting the Cost of Capital for Risk<\/p>\n
What could be assumed about a company?s propensity for risk given a lower-than-industry-average WACC?<\/p>\n","protected":false},"excerpt":{"rendered":"
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 Read More …<\/a><\/p>\n","protected":false},"author":1,"featured_media":0,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[],"tags":[],"class_list":["post-2287","post","type-post","status-publish","format-standard","hentry"],"_links":{"self":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/2287","targetHints":{"allow":["GET"]}}],"collection":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/users\/1"}],"replies":[{"embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/comments?post=2287"}],"version-history":[{"count":0,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/posts\/2287\/revisions"}],"wp:attachment":[{"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/media?parent=2287"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/categories?post=2287"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/www.benedictsol.com\/blogs\/wp-json\/wp\/v2\/tags?post=2287"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}