$9$ Excel Activity: WACC

Start with the partial model in the file Ch$11$ P$18$ Build a Model.xlsx$.$ The stock of Gao Computing sells for $$50,$ and last year's dividend was $$3\mathrm{.}13.$ Security analysts are projecting that the common dividend will grow at a rate of $7\%$ a year. A flotation cost of $10\%$ would be required to issue new common stock. Gao's preferred stock sells for $$32\mathrm{.}61,$ pays a dividend of $$3\mathrm{.}60$ per share, and new preferred stock could be sold with a flotation cost of $8\%.$ The firm has outstanding bonds with $15$ years to maturity, an $11\%$ annual coupon rate, semiannual payments, and $$1,000$ par value. The bonds are trading at $$931\mathrm{.}18.$ The tax rate is $25\%.$ The market risk premium is $6\%,$ the risk$-$free rate is $6\mathrm{.}5\%,$ and Gao's beta is $1\mathrm{.}2.$ In its cost$-$of$-$capital calculations, Gao uses a target capital structure with $50\%$ debt, $15\%$ preferred stock, and $35\%$ common equity.

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places.

Download spreadsheet Ch$11$ P$18$ Build a Model$-419302.$xlsx

Calculate the cost of each capital component$$in other words, the after$-$tax cost of debt, the cost of preferred stock $($including flotation costs$),$ and the cost of equity $($ignoring flotation costs$).$ Use both the CAPM method and the dividend growth approach to find the cost of equity.

After$-$tax cost of debt fill in the blank $2\%$

Cost of preferred stock $($including flotation costs$)$ fill in the blank $3\%$

Cost of common equity, dividend growth approach fill in the blank $4\%$

$($ignoring flotation costs$)$

Cost of common equity, CAPM fill in the blank $5\%$

Calculate the cost of new stock using the dividend growth approach.

fill in the blank $6\%$

Assuming that Gao will not issue new equity and will continue to use the same target capital structure, what is the company's WACC?

fill in the blank $7\%$WACC

$\backslash$table$[[$Current price of common stock, P$\_(0),$$$50,00],[$Last year's dividend on common stock, D$\_(0),$$$3,13],[$Growth rate of common dividend, g$,7\%],[$Flotation cost for common stock,$10\%],[$Current price of preferred stock, P$\_($ps$),$$$32,61],[$Preferred dividend, D$\_($ps$),$$$3,60],[$Flotation cost for preferred stock,$8\%],[$Bond$\text{'}$s years to maturity,$15],[$Number of coupon payment per year,$2],[$Annual coupon rate,$11\%],[$Par value,$$1000,00],[$Bond price,$$931,18],[$Tax rate,$25\%],[$Market risk premium, RP $\_($M$),6,0\%],[$Risk$-$free rate, r$\_($RF$),6,5\%],[$Beta$,1,2],[$Weight of long$-$term debt, w$\_($d$),50\%],[$Weight of preferred stock, w$\_($ps$),15\%],[$Weight of common stock, w$\_($s$),35\%]]$

a$.$ Calculating the cost of each capital component

Annual before$-$tax cost of debt

After$-$tax cost of debt

Cost of preferred stock $($including flotation costs$)$

Cost of common equity, dividend growth approach $($ignoring flotation costs$)$

Cost of common equity, CAPM

b$.$ Calculating the cost of new stock using the dividend growth approach

Cost of new stock, dividend growth approach

$$ Formulas

#N$/$A

#N$/$A

#N$/$A

#N$/$A

#N$/$A

#N$/$A

c$.$ Calculating the company's WACC if Gao will not issue new equity and will continue to use the same target capital structure

WACC

#N$/$A