QUESTIONS 1. SCRPC uses notes to finance its working capital and its seasonal needs. Should the firm
Question:
QUESTIONS
1. SCRPC uses notes to finance its working capital and its seasonal needs. Should the firm use its cost of notes in the measure of the cost of capital?
2. Estimate the firm’s after-tax cost for long debt. Why do analysts use the after-tax measure in the calculation of a firm’s cost of capital?
3. Calculate SCRPC’s cost for preferred stock. Why is there not a tax adjustment?
4. Calculate the cost for the current common stock investors. (a) Estimate the cost for common stock using the Gordon Model (dividend valuation model). (b) Calculate the cost of common stock using the Capital Asset Pricing Model. (c) Find the cost of common stock using Bond Risk Premium Approach.
5. Calculate SCRPC’s cost of capital when retained earnings is the source of common stock financing and the Gordon Model estimate is used. Use current market values of the financial instruments to determine the components weights (see Exhibit VI).
6. What is SCRPC’s cost of capital when the firm has to issue new common stock and the Gordon Model estimate is used? (See Exhibit VII).
9. Should market values or book values be used in the estimation of a firm’s cost of capital. Defend your recommendation
Equity Asset Valuation
ISBN: 978-0470571439
2nd Edition
Authors: Jerald E. Pinto, Elaine Henry, Thomas R. Robinson, John D. Stowe, Abby Cohen