1. Calculate the cost of each capital component, i.e., the after-tax cost of debt, the cost...
Fantastic news! We've Found the answer you've been seeking!
Question:
Transcribed Image Text:
1. Calculate the cost of each capital component, i.e., the after-tax cost of debt, the cost of preferred stock (including flotation costs), the cost of equity (ignoring flotation costs). Equity (Market) Risk Premium Expected Market Return less Risk-free Rate equals Equity Risk Premium Cost of New Debt and Preferred Stock After-tax Cost of Debt Cost of Preferred Stock Cost of Reinvested Profit (Common Equity) Cost of Common Equity (CAPM) 2. Calculate the cost of new stock (capm and float adjustmentl. Cost of Retained Earnings (DCF Method) Cost of New Common Stock (DCF Method) Float Adjustment Cost of New Common Stock 3. Cost of Capital (WACC) WACC (using reinvested profit) WACC (issue new common stock) SO INPUTS USED IN THE MODEL Company Data Common Stock: Current Price of Common Stock Beta Common Stock Dividend, recently paid Growth Rate in Common Dividends and Earnings Flotation cost for common stock Company risk premium Preferred Stock: Price of New Preferred Stock Par Value Preferred Stock Dividend Floatation cost for issuing new preferred stock Debt: Pre-tax cost of debt (adjusted for flotation cost) Tax rate Capital Structure: Target capital structure for common stock Target capital structure for preferred stock Target capital structure for debt Market Data 90-day Treasury Bill Rate) 10-year Treasury Bond Rate Expected Market Dividend. Current Market Index Value Expected long-term US GDP growth rate $50.00 0.91 $2.10 7% 10% 2.5% $30.00 $100.00 3.17% 4.00% 10% 35% 50% 5% 45% 2.00% 6.50% $170 $2,000 4.0% 1. Calculate the cost of each capital component, i.e., the after-tax cost of debt, the cost of preferred stock (including flotation costs), the cost of equity (ignoring flotation costs). Equity (Market) Risk Premium Expected Market Return less Risk-free Rate equals Equity Risk Premium Cost of New Debt and Preferred Stock After-tax Cost of Debt Cost of Preferred Stock Cost of Reinvested Profit (Common Equity) Cost of Common Equity (CAPM) 2. Calculate the cost of new stock (capm and float adjustmentl. Cost of Retained Earnings (DCF Method) Cost of New Common Stock (DCF Method) Float Adjustment Cost of New Common Stock 3. Cost of Capital (WACC) WACC (using reinvested profit) WACC (issue new common stock) SO INPUTS USED IN THE MODEL Company Data Common Stock: Current Price of Common Stock Beta Common Stock Dividend, recently paid Growth Rate in Common Dividends and Earnings Flotation cost for common stock Company risk premium Preferred Stock: Price of New Preferred Stock Par Value Preferred Stock Dividend Floatation cost for issuing new preferred stock Debt: Pre-tax cost of debt (adjusted for flotation cost) Tax rate Capital Structure: Target capital structure for common stock Target capital structure for preferred stock Target capital structure for debt Market Data 90-day Treasury Bill Rate) 10-year Treasury Bond Rate Expected Market Dividend. Current Market Index Value Expected long-term US GDP growth rate $50.00 0.91 $2.10 7% 10% 2.5% $30.00 $100.00 3.17% 4.00% 10% 35% 50% 5% 45% 2.00% 6.50% $170 $2,000 4.0%
Expert Answer:
Answer rating: 100% (QA)
Cost of New Debt The aftertax cost of debt is calculated by taking the pretax cost of debt 10 and subtracting the tax shield benefit of interest payments 35 yielding an aftertax cost of debt of 65 Cos... View the full answer
Related Book For
Managerial Accounting Tools for business decision making
ISBN: 978-1118096895
6th Edition
Authors: Jerry J. Weygandt, Paul D. Kimmel, Donald E. Kieso
Posted Date:
Students also viewed these accounting questions
-
Situation 1 Espino Company has the following stock outstanding: Common Stock Preferred Stock 100,000 shares 9,000 shares s0.50 par value s20 par, $2 dividend The amount available for dividends this...
-
What is the ionization energy of singly ionized helium? A) 54.4 eV B) 27.2 eV C) 13.6 eV
-
The input-output table for a two-sector economy is given as follows: Input to Sector X Input to Sector Y Final Demand Total output Output from Sector X 10 25 15 Output from Sector Y 20 30 10 Value...
-
____, one-way ANOVA compares the means of three or more independent samples.
-
Explain the functional-use test. Explain the taxpayer-use test.
-
Coastal regions of the world where rivers meet the ocean are constantly undergoing gain and loss of land due to the deposition of sediment carried by rivers and to erosion, respectively. The loss of...
-
Without calculating, estimate the population standard deviation of each data set. 1. 2. 8 7 N=8 = 4 Frequency 2 1 0 1 2 3 4 5 6 7 Data entry Frequency 876SY N = 8 = 4 2 1 0 1 2 3 4 5 6 7 Data entry...
-
Since opening in 2009, Akron Aviation has built light aircraft engines and has gained a reputation for reliable and quality products. Factory overhead is applied to production using direct labor...
-
A beam of light with a frequency of 4 x 10 4 Hz is used for a double-slit experiment in water. The index of refraction of water is 1.3. The 1st bright fringe next to the center peak is on the screen...
-
Consider the 2013 declined loan data from LendingClub titled RejectStatsB2013 from the Connect website. Similar to the analysis done in the chapter, lets scrub the risk score data. First, because our...
-
Which of the following reactions is an endothermic reaction? i) Burning of coal ii) Decomposition of vegetable matter into compost iii) Process of respiration iv) Decomposition of calcium carbonate...
-
Ang Electronics, Incorporated, has developed a new mesh network. If successful, the present value of the payoff (when the product is brought to market) is $34.8 million. If the mesh network fails,...
-
Beagle Beauties engages in the development, manufacture, and sale of a line of cosmetics designed to make your dog look glamorous. Below you will find selected information necessary to compute some...
-
Bob Jensen Inc. purchased a $700,000 machine to manufacture specialty taps for electrical equipment. Jensen expects to sell all it can manufacture in the next 10 years. To encourage capital...
-
Solve the equation 10 x + x = -2.
-
Write the code for the following: Modify the program so that the formatted output is shown to the screen and is also written to a text file called `healthResults.txt You will need to open the file...
-
A company has current assets of $200 (cash of $65 and inventory of $135) and current liabilities of $120. At year end, management uses cash of $60 to repay accounts payable. After the repayment, what...
-
Use the method of Example 4.29 to compute the indicated power of the matrix. 1 0 1
-
Agassi Company uses a job order cost system in each of its three manufacturing departments. Manufacturing overhead is applied to jobs on the basis of direct labor cost in Department D, direct labor...
-
Conwell Company manufactures its product, Vitadrink, through two manufacturing processes: Mixing and Packaging. All materials are entered at the beginning of each process. On October 1, 2012,...
-
The four perspectives in the balanced scorecard are (1) Financial, (2) Customer, (3) Internal process, and (4) Learning and growth. Match each of the following objectives with the perspective it is...
-
Explain the term Energy. Discuss its various forms.
-
Explain cyclic and quasi static process.
-
Explain the terms : state, phase, process and cyclic process.
Study smarter with the SolutionInn App