42 Cost of Capital Exercises: I. The capital structure for 3C Corporation is provided below. The company plans to maintain it capital structure in the future. If the firm has a 4% after-tax cost of debt, a 10% cost of preferred stock, and a 16% cost of common stock, what is 3C's weighted cost of capital? 3040120 Capital structure 1,000,000 xOTuo ins 118o $3,000,000 Bonds Preferred stock Common stock 6.000,000 $10,000,000 Total I. Comprehensive Cost of Capital Problem. The Triple Seven Systems, Inc. (TSS), is starting its planning process for next year. Jack Tripper, the firm's CFO, calculates the weighted cost of capital each year to be used as a discount rate in the NPV analysis. You have been asked to help Mr. Tipper to compute the firm's cost of capital. You have collected the following data to do the job: 1,000 par, a TSS bonds carry a coupon rate of 5% with semi-annual payments, a AAA rating, and a maturity of 10 years. The current price of the TSS bonds is / b. TSS preferred stock currently pays a 10% dividend rate on a S100 par value and c. TSS common shares paid a dividend of $2 last year. Dividends have grown at a a C tooo 3.097 $920. n 20 Pmk 2g lo has a market value of $90 per share. rD rate of 6% per year and are expected to continue for a foreseeable future. The market price of the stock is S50 and there would be a flotation cost of 5% on a new issue. d. TSS capital structure is as follows: Bonds (3,000 bonds outstanding) Preferred stock (10,000 shares outstanding) Common stock (600,000 shares) 3,000,000 1,000,000 6,000,000 The firm's tax rate is 40%. Beta is 1.30, 10-year Treasury bond currently yields 3% (r), and the expected market return (rm) is 10%. rsrf br(rm -rb) 43 Assignments 1. Compute the after-tax cost of bonds. 2. What is the cost of retained earnings, first based on the DCF approach and then :93 based on the CAPM approach using an average beta of peer groups as TSS beta. Calculate the average of the two approaches. 3. What is TSS' cost of preferred stock? 4. Calculate the cost of new stock according to the DCF approach. 5. Calculate the weighted cost of capital for TSS assuming (a) only internal equity (retained earnings) is used in financing the equity portion of the new investment, and then (b) new common stock is issued to finance the firm's investments. Cost of Capital Spreadsheet Example ASSIGNMENT # NAME: LAB TIME: Answer Sheet for Cost of Capital Exercises From Previous Page Question I Question I1-1 Question 11-2 Question I1-3 Question Il-4 Question II-Sa Question I1-Sb . 1180 Cut Copy Format BI U . So Wrap Text ffice Update To keep up-to-date with security updates, fines, and improvements, choose Check for Updates Cost of Capital Spreadsheet Example Module IX Name Date Capital Structure weight cost WACC Bonds Preferred stock Common stock Total 3,000,000 1,000,000 6,000,000 10,000,000 WACC 1l-1 After-tax cost of bonds: Semi-Annual YTM Annual YTM. Cost of Bonds- 1l-2 Cost of retained earnings: DCF approach CAPM approach Average . Cost of preferred stock Cost of New Common Stock I1-3 -4 1l-5a Amount Weight Cost WACC 3,000,000 1,000,000 6,000,000 10,000,0DD Bonds 5 Preferred Stock Retained earnings Total Amount Weight Cost WACC 9 II-5b 0 Bonds 1 Preferred Stock 2 New Common Stock 3 Total 4 5 3,000,000 1,000,000 6.000,000 4Financial Statements Statement of CF Financial RatiosTime Value Risk & Return MacBook Air esc 0 42 Cost of Capital Exercises: I. The capital structure for 3C Corporation is provided below. The company plans to maintain it capital structure in the future. If the firm has a 4% after-tax cost of debt, a 10% cost of preferred stock, and a 16% cost of common stock, what is 3C's weighted cost of capital? 3040120 Capital structure 1,000,000 xOTuo ins 118o $3,000,000 Bonds Preferred stock Common stock 6.000,000 $10,000,000 Total I. Comprehensive Cost of Capital Problem. The Triple Seven Systems, Inc. (TSS), is starting its planning process for next year. Jack Tripper, the firm's CFO, calculates the weighted cost of capital each year to be used as a discount rate in the NPV analysis. You have been asked to help Mr. Tipper to compute the firm's cost of capital. You have collected the following data to do the job: 1,000 par, a TSS bonds carry a coupon rate of 5% with semi-annual payments, a AAA rating, and a maturity of 10 years. The current price of the TSS bonds is / b. TSS preferred stock currently pays a 10% dividend rate on a S100 par value and c. TSS common shares paid a dividend of $2 last year. Dividends have grown at a a C tooo 3.097 $920. n 20 Pmk 2g lo has a market value of $90 per share. rD rate of 6% per year and are expected to continue for a foreseeable future. The market price of the stock is S50 and there would be a flotation cost of 5% on a new issue. d. TSS capital structure is as follows: Bonds (3,000 bonds outstanding) Preferred stock (10,000 shares outstanding) Common stock (600,000 shares) 3,000,000 1,000,000 6,000,000 The firm's tax rate is 40%. Beta is 1.30, 10-year Treasury bond currently yields 3% (r), and the expected market return (rm) is 10%. rsrf br(rm -rb) 43 Assignments 1. Compute the after-tax cost of bonds. 2. What is the cost of retained earnings, first based on the DCF approach and then :93 based on the CAPM approach using an average beta of peer groups as TSS beta. Calculate the average of the two approaches. 3. What is TSS' cost of preferred stock? 4. Calculate the cost of new stock according to the DCF approach. 5. Calculate the weighted cost of capital for TSS assuming (a) only internal equity (retained earnings) is used in financing the equity portion of the new investment, and then (b) new common stock is issued to finance the firm's investments. Cost of Capital Spreadsheet Example ASSIGNMENT # NAME: LAB TIME: Answer Sheet for Cost of Capital Exercises From Previous Page Question I Question I1-1 Question 11-2 Question I1-3 Question Il-4 Question II-Sa Question I1-Sb . 1180 Cut Copy Format BI U . So Wrap Text ffice Update To keep up-to-date with security updates, fines, and improvements, choose Check for Updates Cost of Capital Spreadsheet Example Module IX Name Date Capital Structure weight cost WACC Bonds Preferred stock Common stock Total 3,000,000 1,000,000 6,000,000 10,000,000 WACC 1l-1 After-tax cost of bonds: Semi-Annual YTM Annual YTM. Cost of Bonds- 1l-2 Cost of retained earnings: DCF approach CAPM approach Average . Cost of preferred stock Cost of New Common Stock I1-3 -4 1l-5a Amount Weight Cost WACC 3,000,000 1,000,000 6,000,000 10,000,0DD Bonds 5 Preferred Stock Retained earnings Total Amount Weight Cost WACC 9 II-5b 0 Bonds 1 Preferred Stock 2 New Common Stock 3 Total 4 5 3,000,000 1,000,000 6.000,000 4Financial Statements Statement of CF Financial RatiosTime Value Risk & Return MacBook Air esc 0