193 x fe B G D E F 5 INPUTS USED IN THE MODEL 6 7 Pa $50.00 8 Net P $20.00 9 Dy $3.30 10 De $2.10 11 g 7% 12 B-T 10% 13 Skye's beta 0.83 14 Market risk premium, RPM 6.0% 15 Risk free rate, 6.5% 16 Target capital structure from debt 45% 17 Target capital structure from preferred stock 5% 18 Target capital structure from common stock 50% 19 Tax rate 35% 20 Flotation cost for common 10% 21 22 a Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of referred stock (including flotation costs and the cost of equity ignoring flotation costs). Use both the the CAPM method and the dividend growth 23 approach to find the cost of equity. 24 25 Cost of debt 26 27 B-T (1 -T) 26 (2 points) 29 30 Cost of preferred stock (including Rotation costs: 31 32 D Net P 33 2 points) 34 35 Cost of common equity, dividend growth approach ignoring flotation costs): 36 37 D 7 . 0 38 (2 points) 379 Build a Model AT MacBook Air esc DOG 20 2 000 4 *** N . F3 . # 3 $ 4 % 5 2 6 Excel Assignment 7 Ch 11 P18 Betu. Draw Page Layout Insert Formulas Data Review View Home Tell me Times New Roman 10 - A A General 8 Wrap Text - Date BIU WA Merge Center $ % ) 89%BWXXN 193 x x A B D E F G 22 a Calculate the cost of each capital component that is, the after-tax cost of debt, the cost of preferred stock (including flotation costa), and the cost of equity ignoring flotation costs). Use both the the CAPM method and the dividend growth 23 approach to find the cost of equity. 24 25 Cost of debt 26 27 B-T (1-T) ATT 28 (2 points) 29 30 Cost of preferred stock (including Rotation costs: D Net 2 points) . 34 35 Cost of common equity, dividend growth approach ignoring Wotation costs 36 37 Di 1 P. 9 38 39 40 Cost of common equity, CAPM: (2 points) 88888888888 - DK RPM 43 12 points) 44 45 16 IMPORTANT NOTE: HERE THE CAPM AND THE DIVIDEND GROWTH METHODS PRODUCE APPROXIMATELY THE SAME 47 COST OF EQUITY. THAT OCCURRED BECAUSE WE USED A BETA IN THE PROBLEM THAT FORCED THE SAME RESULT 48 ORDINARILY, THE TWO METHODS WILL PRODUCE SOMEWHAT DIFFERENT RESULTS. 49 50 D. Calculate the cost of new stock using the dividend growth approach 52 Dit) Po. (1-5). 53 12 points) 54 35. What is the cost of new common stock based on the CAPM7 Hint Find the difference between rand, as determined by Se the dividend growth approach and add that differential to the CAPM value for) Buda Model + MacBook Air esc go 000 non Aber Excel Assignment 7 Ch 11 P18 A 3. Home Insert Draw Page Layout Formulas Data Review View Tell me X Times New Roman 10 A A 28 Wrap Test General Paste B TV OA == = = 1 Merge Carter $% 9 12 193 1 x x A D E F G + SS3398 50 b. Calculate the cost of new stock using the dividend growth approach. 51 52 Do (19) Po.( 1F) g 53 12 points) 54 55. What is the cost of new common stock based on the CAPM7 Hint Find the difference between andr, as determined by 56 the dividend growth approach and add that differential to the CAPM value for ..) 57 58 Differential 59 (2 points) 60 61 Again, we would not normally find that the CAPM and dividend growth methods yield identical results. 62 3 d. Assuming that Gan will not issue new equity and will continue to use the same capital structure, what is the company's 64 WACC? 65 66 w 45.0% 67 W 50% 68 W 50.0% 69 100.0% 70 71 W. AT W, 72 12 points) 73 74 e. Suppose Go is evaluating three projects with the following characteristics 75 70 (1) Each project has a cost of $1 million. They will all be financed using the target mix of long-term debt, preferred stock, and common equity. The cost of the common equity for each project should be based on the beta estimated for TH the project. All equity will come from ruinvested earnings, BO (2) Equity invested in Project A would have a beta of 0.5. The project has an expected return of 0.0% 81 12 () Equity Invested in Project I would have a beta of 1.0. The project has an expected return of 10.0% 14) Equity invested in Project C would have a beta of 2.0. The project has an expected return of 11.0% WACC Buda Model MacBook Air esc 20 000 F2 F 000 76 (a # $ CA % & Excel Assignment 7 Ch 11 P18 Acte c Condom Formatting Table Home Insert Draw Page Layout Formulas Data Review View Tell me Times New Roman 10 - A A General Pile 3 BU OA Cante $% % 33 f A C D E F G d. Assuming that so will notice new equity and will continue to use the same capital structure, what is the company's 64 WACC? H 66 57 W 58 60 20 45 ON 50% 500% 100.00 WATU W WA WACC 2) 72 73 74 75 T9 Te Suppose ao is evaluating three projects win the following characters Echt has a cost oft million. They will all be financed using the target mix of long-term debt, preferred stock and common equity. The cost of the community for each project should be based on the beta estimated for the project. All quity will come from raised amnings Eity invested in Project A would have a bets of 0.5. The project has an expected return of Equity invested in Project would have a bit of The project has an expected return of 100% Equity invested in Project would have a bea of 20. The project has an expected retum of 10% Analyse company's on and explain why mach project should be copied or rejected Expected anon project Actor WACC ta 05 10 20 PE point) 12 points) 2 points 18513818 MacBook Air esc & 20 T3 GUG 14 2. A 8 @ 2 # 3 . $ 4 unde % 5 & 7 8 6