This case provides a comprehensive and realistic review of WACC computations and some of the theoretical questions

Question:

This case provides a comprehensive and realistic review of WACC computations and some of the theoretical questions related to the WACC and its uses.

1. Compute the yield to maturity and the after-tax cost of debt for the two bond issues.

2. Compute BioCom’s cost of preferred stock.

3. Compute BioCom’s cost of common equity. Use the average of results from the dividend growth model and the security market line.

4. Compute BioCom’s weighted average cost of capital. Should you use book values or market values for this computation?

5. BioCom could sell new bonds with maturities of fifteen to twenty years at approximately the same yield as Bond 2. It would, however, incur flotation costs of $20.00 per $1,000 of par value. Estimate the effective interest rate BioCom would have to pay on a new issue of long-term debt.

6. Some of BioCom’s projects are of low risk, some average risk, and some high risk. Should BioCom use the cost of capital to evaluate all of its projects, or adjust the discount rate to reflect different levels of risk?

Cost Of Capital
Cost of capital refers to the opportunity cost of making a specific investment . Cost of capital (COC) is the rate of return that a firm must earn on its project investments to maintain its market value and attract funds. COC is the required rate of... Cost Of Debt
The cost of debt is the effective interest rate a company pays on its debts. It’s the cost of debt, such as bonds and loans, among others. The cost of debt often refers to before-tax cost of debt, which is the company's cost of debt before taking... Discount Rate
Depending upon the context, the discount rate has two different definitions and usages. First, the discount rate refers to the interest rate charged to the commercial banks and other financial institutions for the loans they take from the Federal... Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their... Maturity
Maturity is the date on which the life of a transaction or financial instrument ends, after which it must either be renewed, or it will cease to exist. The term is commonly used for deposits, foreign exchange spot, and forward transactions, interest...