Cost Of Capital Worksheet Review

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%
   

 

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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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