Build a Model Student $1/1/2021$

Chapter: $11$

Problem: $18$

INPUTS USED IN THE MODEL

P$0$ $$50\mathrm{.}00$

D$0$ $$3\mathrm{.}13$

g $7\%$

Flotation cost for common $10\%$

Ppf $$32\mathrm{.}61$

Dpf $$3\mathrm{.}30$

Flotation cost for preferred $8\%$

Bond maturity $20$

Payments per year $2$

Annual coupon rate $12\%$

Par $$1,000\mathrm{.}00$

Bond price $$1,171\mathrm{.}59$

Tax rate $25\%$

Beta $1\mathrm{.}2$

Market risk premium, RPM $6\mathrm{.}0\%$

Risk free rate, rRF $6\mathrm{.}5\%$

Target capital structure from debt $45\%$

Target capital structure from preferred stock $5\%$

Target capital structure from common stock $50\%$

a$.$ Calculate the cost of each capital component, that is$,$ the after$-$tax cost of debt, the cost of preferred stock $($including flotation costs$),$ and the cost of equity $($ignoring flotation costs$).$ Use both the the CAPM method and the dividend growth approach to find the cost of equity.

Cost of debt:

N $=40$

PMT $=$ $$60\mathrm{.}00$

PV $=-$$$1,171\mathrm{.}59$

FV $=$ $$1,000\mathrm{.}00$

Semiannual yield $=$ RATE $=5\mathrm{.}00\%$

Annual B$-$T rd $=10\mathrm{.}00\%$

B$-$T rd $\backslash$times $(1$ T$)=$ A$-$T rd

$10\%75\%=7\mathrm{.}50\%$

Cost of preferred stock $($including flotation costs$)$:

Dpf $/$ Net Ppf $=$ rpf

$$3\mathrm{.}30$ $$30\mathrm{.}00=11\mathrm{.}00\%$

Cost of common equity, dividend growth approach $($ignoring flotation costs$)$:

D$1/$ P$0+$ g $=$ rs

$$3\mathrm{.}20$ $$50\mathrm{.}007\%13\mathrm{.}40\%$

Cost of common equity, CAPM:

rRF $+$ b $\backslash$times RPM $=$ rs

$6\mathrm{.}5\%7\mathrm{.}20\%=13\mathrm{.}700\%$

b$.$ Calculate the cost of new stock using the dividend growth approach $($include flotation costs$).$

D$0\backslash$times $(1+$ g$)/$ P$0\backslash$times $(1$ F$)+$ g $=$ re

$$3\mathrm{.}35$ $$45\mathrm{.}007\%14\mathrm{.}44\%$

c$.$ Assuming that Gao will not issue new equity and will continue to use the same capital structure, what is the company's WACC?

wd $45\mathrm{.}0\%$

wpf $5\mathrm{.}0\%$

ws $50\mathrm{.}0\%$

$100\mathrm{.}0\%$

wd $\backslash$times A$-$T rd $+$ wpf $\backslash$times rpf $+$ ws $\backslash$times rs $=$ WACC

$-0\mathrm{.}51\%0\mathrm{.}55\%6\mathrm{.}85\%=6\mathrm{.}89\%$

Need correct answers