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4.1 Cost of Capital Exercise Computation

1. The weighted average cost of capital (WACC) is calculated to be 7.40% based on a capital structure of 20% debt at a cost of 7% and 80% equity at a cost of 7.5%. 2. The required return on preferred stock is calculated to be 16.48% based on a dividend yield of 9% and a capital structure of 15% preferred stock. 3. The cost of debt is calculated to be 7% based on a tax rate of 50% and an interest rate of 14%.

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51 views

4.1 Cost of Capital Exercise Computation

1. The weighted average cost of capital (WACC) is calculated to be 7.40% based on a capital structure of 20% debt at a cost of 7% and 80% equity at a cost of 7.5%. 2. The required return on preferred stock is calculated to be 16.48% based on a dividend yield of 9% and a capital structure of 15% preferred stock. 3. The cost of debt is calculated to be 7% based on a tax rate of 50% and an interest rate of 14%.

Uploaded by

Nicole Lasi
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as XLSX, PDF, TXT or read online on Scribd
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1 = =0.08 +.

05 6=
22.4
=
= 0.0357142857143 +.05

= 8.57% =

2= 1.15+(1.15*.025) +0.025
19.06 7
Equity
Preference
= 1.17875 +0.025 Debt
19.06 Total

= 0.0618441762854 +0.025
8
= 8.68% Debt
=
3= 15 =
100-100*.09 =
Preferred
= 15 =
100-9
=
= 16.48%
Equity
4 Debt =
= .14(1-.5)
= .14(.5)
= 7.00% =

Ordinary Shares =
= 2 +.05
80 9
= 0.025 +.05 Debt
= 7.50% Equity

Debt
WACC =
Debt 20% 7.00% 1.40% =
Equity 80% 7.50% 6.00%
WACC 7.40% 10
Divident Growth
=
5
= 11 +0.05 =
115-5

= 11 +0.05 =
110 =

= 0.1 +0.05 CAPM


=
= 15.00% =
10
100-2
10
98

10.20%

4,000,000.00 31.18% 18.50% 5.77%


2,080,000.00 16.21% 14.29% 2.32%
6,750,000.00 52.61% 10.95% 5.76%
12,830,000.00 100.00% 43.74% 13.85%

11%(1-.3)
11%(.7)
7.70%

9
100
9.00%

25 +.05
200

0.125 +.05

17.50%

20% 0.06 0.012


80% 16% 0.128
0.14

.12(1-.3)
8.40%

1.56+1.56*.03 +.03
28
1.6068 +.03
28

0.057385714286 +.03
8.74%

.03+1.13(.105-.03)
11.48%

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