finance-The assignment in this module builds on the idea of forecasting

QUESTION

Cost
of Capital Worksheet

The assignment in this module
builds on the idea of forecasting and valuation theory from Chapters 6 and 7 in
Module Six by valuing a company through calculations using real data. This will
strengthen your recommendation in the final project by giving you the means to
provide evidence from a financial analysis.

Prompt
Review the questions below and
use the data provided in the question to solve the calculation. As you work
through each equation, think about where the data for your company may be found
to make the same calculations and how the information from these calculation
can inform your recommendations for your final project.

1. 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 =

2. 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 =

3. What is XYZ’s estimated cost of common
equity using the CAPM approach?

β

1.2

rRF

7%

RPM

6%

Estimated Cost of Common Equity =

4. 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 =

5. 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 =

6. What is your final estimate for rs?

METHOD

ESTIMATE

CAPM

14.20%

DCF

13.80%

rd + RP

14.00%

Estimate =

7. 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
8. 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%

ANSWER:

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