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Please first estimate the cost of each component of capital. Then, figure out the current capital structure according to the market value of debt and of equity. Finally, calculate the WACC. Cost of Debt, ra: Allied has outstanding 20-year noncallable bonds with a face value of $1,000, an 8% annual coupon (annual payment), and a market price of $908.71. If Allied is planning to issue new debt, what would be a reasonable estimate of the interest rate on the new debt? If Allied's marginal tax rate is 40%, what is its after-tax cost of debt? Before-tax cost of debt: Timeline: (you can skip the timeline.) PMT: FV: PV: MODE: Answer: After-tax cost of debt: Answer: Cost of Preferred Stock,r: Allied's preferred stock currently trades at 550 per share and pays a 55 annual dividend per share. gnoring flotation costs, what is Allied's cost of preferred stock? Answer Cost of Common Equity: Cost of Retained Earnings, r: Suppose that (1) the risk-free return is 6%; (2) the average stock return (ie, the market return) is 11%, (3) Allied stock's beta (e. stock's market risk) is 1.6; (4) the next dividend payment will be $2; (4) the growth rate of the dividend is 6%; (5) the current market price of the stock is $25; and (6) the risk premium on Allied's stock over Allied's bond is 4%. Given the information above, calculate the cost of retained earnings using (1) Capital Asset Pricing Model, CAPM, approach; (2) Bond-yield-plus-risk-premium approach; and (3) Discounted Cash Flow, DCF, approach. (1) CAPM approach: (2) Bond-yield-plus-risk-premium approach: (Hint: bond yield has been calculated in the previous question.) (3) DCF approach: What is the range of your estimations? What is the midpoint of this range? Cost of New Common Stock, Te! The flotation cost of issuing new common stock, F, is 14% of the issue price. According to the previously provided information on Allied's outstanding common stock, estimate the cost of new common stock using the DCF approach. According to the DCF approach cost of new common stock calculated above, (1) figure out the flotation cost adjustment for new common stock, and then (2) considering the cost of retained earnings from all three approaches, adjust for this flotation cost. What is the cost of new common stock? Fill in the blanks in this detailed capital structure table: Calculate the market value of total equity, ie total common equity, and the market value of total capital, i.e. total debt and total equity. Then calculate the market value weight of total debt and of total equity, ie. Allied's current capital structure. (Hint: please read the Notes carefully to find the information needed to calculate the market value of total equity.) Assets and Claims Against Assets at Book Value on 12/31/18 Assets Investor Supplied Capital: Payables and Accruals Are Excluded Because They Come from Operations, Not from Investors Book Value Market Value Target (1) (2) (3) Cash Receivables Inventories Total CA $ 10 375 615 $1,000 Accounts payable Accruals Notes payable TotalCL 3.0% 7.0% 1105.5% $ 310 15.56 110 $ 110 Net fixed assets $1,000 750 $1,060 47.8% 0.0% 750 $ 860 - 45.0% 2.0% 0.096 Long-term debt Total liabilities Preferred stock Common stock Retained earnings Total common equity Total 130 810 $ 940 $2,000 37.5% 53.0% 0.0% 6.5% 40.5% 47.0% 100.0% 750 S 860 - 130 810 $ 940 $1,800 52.2% 100.0% 53.096 100.096 Total $2.000 100.096 Notes: 1. The market value calculations assume that the company's debt is trading at par, so the market value of debt equals the book value of debt. 2. The market value of equity is the share price of common stock multiplied by the number of shares outstanding. Al 12/31/18, the firm has 50 million shares outstanding, and its stock sold for $23.06 per share. Weighted Average cost of Capital, WACC: Assume in the future Allied will raise new capital according to their target capital structure, Le 45% debt, 2% preferred stock, and 53% common equity. Using the previously calculated cost of each component of capital, (1) what will be Allied's WACC if it does not issue any new stock, L.e. common equity is all internal equity, from retained earnings? (2) what will be Allied's WACC if it issues new stock to raise common equity, le.common equity is all external equity, from new common stock? Please first estimate the cost of each component of capital. Then, figure out the current capital structure according to the market value of debt and of equity. Finally, calculate the WACC. Cost of Debt, ra: Allied has outstanding 20-year noncallable bonds with a face value of $1,000, an 8% annual coupon (annual payment), and a market price of $908.71. If Allied is planning to issue new debt, what would be a reasonable estimate of the interest rate on the new debt? If Allied's marginal tax rate is 40%, what is its after-tax cost of debt? Before-tax cost of debt: Timeline: (you can skip the timeline.) PMT: FV: PV: MODE: Answer: After-tax cost of debt: Answer: Cost of Preferred Stock,r: Allied's preferred stock currently trades at 550 per share and pays a 55 annual dividend per share. gnoring flotation costs, what is Allied's cost of preferred stock? Answer Cost of Common Equity: Cost of Retained Earnings, r: Suppose that (1) the risk-free return is 6%; (2) the average stock return (ie, the market return) is 11%, (3) Allied stock's beta (e. stock's market risk) is 1.6; (4) the next dividend payment will be $2; (4) the growth rate of the dividend is 6%; (5) the current market price of the stock is $25; and (6) the risk premium on Allied's stock over Allied's bond is 4%. Given the information above, calculate the cost of retained earnings using (1) Capital Asset Pricing Model, CAPM, approach; (2) Bond-yield-plus-risk-premium approach; and (3) Discounted Cash Flow, DCF, approach. (1) CAPM approach: (2) Bond-yield-plus-risk-premium approach: (Hint: bond yield has been calculated in the previous question.) (3) DCF approach: What is the range of your estimations? What is the midpoint of this range? Cost of New Common Stock, Te! The flotation cost of issuing new common stock, F, is 14% of the issue price. According to the previously provided information on Allied's outstanding common stock, estimate the cost of new common stock using the DCF approach. According to the DCF approach cost of new common stock calculated above, (1) figure out the flotation cost adjustment for new common stock, and then (2) considering the cost of retained earnings from all three approaches, adjust for this flotation cost. What is the cost of new common stock? Fill in the blanks in this detailed capital structure table: Calculate the market value of total equity, ie total common equity, and the market value of total capital, i.e. total debt and total equity. Then calculate the market value weight of total debt and of total equity, ie. Allied's current capital structure. (Hint: please read the Notes carefully to find the information needed to calculate the market value of total equity.) Assets and Claims Against Assets at Book Value on 12/31/18 Assets Investor Supplied Capital: Payables and Accruals Are Excluded Because They Come from Operations, Not from Investors Book Value Market Value Target (1) (2) (3) Cash Receivables Inventories Total CA $ 10 375 615 $1,000 Accounts payable Accruals Notes payable TotalCL 3.0% 7.0% 1105.5% $ 310 15.56 110 $ 110 Net fixed assets $1,000 750 $1,060 47.8% 0.0% 750 $ 860 - 45.0% 2.0% 0.096 Long-term debt Total liabilities Preferred stock Common stock Retained earnings Total common equity Total 130 810 $ 940 $2,000 37.5% 53.0% 0.0% 6.5% 40.5% 47.0% 100.0% 750 S 860 - 130 810 $ 940 $1,800 52.2% 100.0% 53.096 100.096 Total $2.000 100.096 Notes: 1. The market value calculations assume that the company's debt is trading at par, so the market value of debt equals the book value of debt. 2. The market value of equity is the share price of common stock multiplied by the number of shares outstanding. Al 12/31/18, the firm has 50 million shares outstanding, and its stock sold for $23.06 per share. Weighted Average cost of Capital, WACC: Assume in the future Allied will raise new capital according to their target capital structure, Le 45% debt, 2% preferred stock, and 53% common equity. Using the previously calculated cost of each component of capital, (1) what will be Allied's WACC if it does not issue any new stock, L.e. common equity is all internal equity, from retained earnings? (2) what will be Allied's WACC if it issues new stock to raise common equity, le.common equity is all external equity, from new common stock