1. What is the cost of common equity-

DDM?

2. Before -tax cost of debt?

Before-ax cosi of debt 8 Tax rete 9 Net Price of Preferred stock (artededucting floatation c 10 Dividend per share of P 1 Current price of Common stock stock 12 Dividend paid in the recent past for Common 13 Growth rate 14 Stock Beta 15 Market risk premium 16 Risk free rate () 17 Flotation cost for common stock 18 Weight of debt in the targct capital structure 19 Weight of preferred stock in the target capital structure 20 Weight ofcommon stock in the arget canital structure 21 22 Required 23 Calculate the cost of debt (aftcr tax cost of debt), oost of preferred s B-Trd 8% 34% 656 0.81 6.2% 5% 40% 50% 25 the cost of equity cignoring notation costs) with the DCF method and the CAPM method. 26 27 281. Cost of Common Equity: Relevant equations from chapter 13 (A) CAPM: (RM-R)Market Risk Premium 32 (B DDM: 35 2. Cost of Preferred stock: 38 3. Cost of Debt: a. Cost of debt is calculated as before-tax and after-tax. 40 Before tax calculation is the same as the YTM calculation (will show you an example in class) 41 YTM can be calculated using TVM on a financial calculator b. Coverting before tax cost of debt into after-tax cost of debt: After-tax cost of debt 43 Before-tax cost of debt1 Tax rate 47 4. Weighted Average Cost of Capital (WAC S+B 51 Include Preferred stock into the equation. 52 e. Suppose Gao is evalunting three projects with the following characteristics: 54 )Each projeet has a cost of SI million. They will all be nanced using the target mix of long ter debt, preferred stock, and common equity The cost of the common equity for cach project should be based on the beta estimated for 57 58 the project. No new equity will be issued. ) Equity invested in Project A would have a beta of 0.6 and an expected return of 9.2%. Equity invested in Project B would have a beta of 1.2 and an expected return of 10.8%. 63 l (4) Equity invested in Project C would have a beta of 1.90 and an expected return of 10.8%. 65 f. Analyze the company's situation and explain why cach project should be accepted or rcjected. rcturn on 67 68 Project A 69 Project B 70 Project C 71 Bcta WACCprojectAcc You can accepothe project as long as the WACC is less than expected return. 74