A B 1 Calculating the WACC 2 3 Skye Computer Company: Balance Sheet as of December 31 4 (in thousands of dollars) 5 6 Current assets 7 Net fixed assets 8 Total assets 9 10 Accounts payable and accruals 2021 $1,750 3,250 $5,000 $900 11 Short-term debt 12 Long-term debt 200 1,550 13 Preferred stock 14 Common stock 15 Retained earnings 16 Total common equity 17 Total liabilities and equity 18 19 Last year's earnings per share 250 1,025 1,075 $2,100 $5,000 $2.90 20 Current price of common stock, Po $45.00 21 Last year's dividend on common stock, Do $1.90 22 Growth rate of common dividend, g 8% 23 Flotation cost for common stock, F 9% 24 Common stock outstanding 50,000 25 Current price of preferred stock, Pp $30.00 26 Dividend on preferred stock, Dp $3.00 27 Preferred stock outstanding 10,000 28 Before-tax cost of debt, rd 11% 29 Market risk premium, TM - TRF 4% 30 Risk-free rate, TRF 5% 31 Beta 1.754 32 Tax rate 25% 33 Total debt $1,750 thousand 34 D E F G H J K M N Skye's earnings per share last year were $2.90. The common stock sells for $45.00, last year's dividend (Do) was $1.90, and a flotation cost of 9% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 8%. Skye's preferred stock pays a dividend of $3.00 per share, and its preferred stock sells for $30.00 per share. The firm's before-tax cost of debt is 11%, and its marginal tax rate is 25%. The firm's currently outstanding 11% annual coupon rate, long-term debt sells at par value. The market risk premium is 4%, the risk-free rate is 5%, and Skye's beta is 1.754. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $1.75 million. 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 Calculating the WACC-827729.xlsx a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. % After-tax cost of debt: Cost of preferred stock: % Cost of retained earnings: Cost of new common stock: % % b. Now calculate the cost of common equity from retained earnings, using the CAPM method. % c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between r and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) % d. If Skye continues to use the same market-value capital structure, what is the firm's WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.) WACC1: WACC2: % % 29 Market risk premium, TM - TRF 30 Risk-free rate, TRF 31 Beta 32 Tax rate 33 Total debt 34 4% 5% 1.754 25% $1,750 thousand 35 a. Calculating the cost of each capital component (using the DCF method to find 36 the cost of common equity) 37 After-tax cost of debt 38 Cost of preferred stock 39 Cost of retained earnings 40 Cost of new common stock Formulas #N/A #N/A #N/A #N/A 41 42 b. Calculating the cost of common equity from retained earnings, using the CAPM method #N/A 43 Cost of retained earnings 44 45 c. Calculating the cost of new common stock based on the CAPM 46 Flotation cost adjustment 47 Cost of new common stock 48 49 d. Calculating the firm's WACC assuming that (1) it uses only retained earnings for equity and 50 51 (2) if it expands so rapidly that it must issue new common stock 52 Total debt Market value (in thousands) Weight 53 Preferred stock 54 Common equity 55 Total 56 57 WACC 58 WACC2 59 60 61 62 #N/A #N/A Market value (in thousands) Weight #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A #N/A