Excel Activity: Calculating the WACC

Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars):

	2021
Current assets		$	1,750
Net fixed assets			3,250
Total assets		$	5,000
Accounts payable and accruals		$	800
Short-term debt			100
Long-term debt			1,300
Preferred stock (15,000 shares)			400
Common stock (50,000 shares)			1,175
Retained earnings			1,225
Total common equity		$	2,400
Total liabilities and equity		$	5,000

Skye's earnings per share last year were $2.60. The common stock sells for $50.00, last year's dividend (D₀) was $1.80, and a flotation cost of 11% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 10%. Skye's preferred stock pays a dividend of $2.70 per share, and its preferred stock sells for $30.00 per share. The firm's before-tax cost of debt is 9%, and its marginal tax rate is 25%. The firm's currently outstanding 9% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%, and Skye's beta is 1.306. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.4 million.

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places.

Download spreadsheet Calculating the WACC-cde3e1.xlsx

Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.

After-tax cost of debt: fill in the blank 2 %

Cost of preferred stock: fill in the blank 3 %

Cost of retained earnings: fill in the blank 4 %

Cost of new common stock: fill in the blank 5 %

Now calculate the cost of common equity from retained earnings, using the CAPM method.

fill in the blank 6 %

What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r_e and r_s as determined by the DCF method, and add that differential to the CAPM value for r_s.)

fill in the blank 7 %

If Skye continues to use the same market-value capital structure, what is the firm's WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.)

WACC₁: fill in the blank 8 %

WACC₂: fill in the blank 9 %

Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars): is the sum of the company's short-term debt and long-term debt, equals $1.4 million. Download spreadsheet Calculating the WACC-cde3e1.xlsx After-tax cost of debt: 1% Cost of preferred stock: Cost of retained earnings Cost of new common stock b. Now calculate the cost of common equity from retained earnings, using the CAPM method. simple average of the required values obtained under the two methods in calculating WACC.) WACC 1 : Calculating the WACC Skye Computer Company: Balance Sheet as of December 31 (in thousands of dollars) Current assets Net fixed assets Total assets 2021$1,7503,250$5,000 Accounts payable and accruals Short-term debt Long-term debt Preferred stock $800 100 Common stock Retained earnings Total common equity Total liabilities and equity 1,225$2,400$5,000 Last year's earnings per share Current price of common stock, P0 Last year's dividend on common stock, D0 Growth rate of common dividend, g Flotation cost for common stock, F Common stock outstanding Current price of preferred stock, PP Dividend on preferred stock, Dp Preferred stock outstanding Before-tax cost of debt, rd Market risk premium, rMrRF Risk-free rate, IRF Beta Tax rate Total debt $2.60 $50.00 $1.80 a. Calculating the cost of each capital component (using the DCF method to find the cost of common equity) After-tax cost of debt Cost of preferred stock Cost of retained earnings Cost of new common stock Formulas b. Calculating the cost of common equity from retained earnings, using the CAPM method Cost of retained earnings c. Calculating the cost of new common stock based on the CAPM Flotation cost adjustment Cost of new common stock d. Calculating the firm's WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock