1. What is the market interest rate onXYZ’s debt and its component cost of debt?
1. What is the market interest rate onXYZ’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%
Market Interest Rate =
Cost of Debt =
2. What is the firm’s cost of preferred stock?
Nominal dividend rate
10%
Dividends per year
4
Par value
$100
Price
$111.10
Cost of Preferred Stock =
3. What isXYZ’s estimated cost of common equity using the CAPM approach?
β
1.2
rRF
7%
RPM
6%
Estimated Cost of Common Equity =
4. What is the estimated cost of common equity using the DCF approach?
Price
$50
Current dividend
$4.19
Constant growth rate
5%
Estimated Cost of Common Equity =
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 onXYZ’s debt
10%
Bond-yield-plus-risk-premium estimate =
6. What is your final estimate for rs?
METHOD
ESTIMATE
CAPM
14.20%
DCF
13.80%
rd + RP
14.00%
Estimate =
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
Cost of Newly Issued Common Stock
8. What isXYZ’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.
Wd
30%
rd (1 – T)
6.00%
wp
10%
rp
9.00%
wc
60%
rs
14.00%
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