Reference no: EM131578467

Cost of Capital Worksheet

The assignment in this module builds on the idea of forecasting and valuation theory from Chapters 6 and 7 in Module Six by valuing a company through calculations using real data. This will strengthen your recommendation in the final project by giving you the means to provide evidence from a financial analysis.

Prompt

Review the questions below and use the data provided in the question to solve the calculation. As you work through each equation, think about where the data for your company may be found to make the same calculations and how the information from these calculations can inform your recommendations for your final project. Use the non-graded discussion board in this module to ask questions of your peers to inform your responses to the questions below. This assignment must be submitted as an Excel file.

1. What is the market interest rate on XYZ's debt and its component cost of debt?

Coupon rate - 12%

Coupons per year - 2

Years to maturity - 15

Price - $1,153.72

Face value - $1,000

Tax rate - 40%

2. What is the firm's cost of preferred stock?

Nominal dividend rate - 10%

Dividends per year - 4

Par value - $100

Price - $111.10

3. What is XYZ's estimated cost of common equity using the CAPM approach?

Β - 1.2

r_RF - 7%

RP_M - 6%

4. What is the estimated cost of common equity using the DCF approach?

Price - $50

Current dividend - $4.19

Constant growth rate - 5%

5. What is the bond-yield-plus-risk-premium estimate for XYZ's cost of common equity?

"Bond yield + RP" premium - 4%

market interest rate on XYZ's debt - 10%

6. What is your final estimate for r_s?

METHOD              ESTIMATE

CAPM                   14.20%

DCF                        13.80%

r_d + RP                   14.00%

7. XYZ estimates that if it issues new common stock, the flotation cost will be 15%. XYZ incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?

% Flotation cost - 15%

Net proceeds after flotation - $42.50

8. What is XYZ's overall, or weighted average, cost of capital (WACC)?  Ignore flotation costs.

w_d           30%        r_d (1 - T)        6.00%

w_p           10%        r_p                   9.00%

w_c           60%        r_s                    14.00%