ASSIGNMENT The purpose of this assignment is to solidify your understanding on the applications of the cost of capital topics The scores of this assignment will help assessing the following learning goal of the course: "students successfully completing this course will be able to estimate and interpeet the cost of capital of a farm based on different capital structures You are roquired to use a financial calculator or spreadsheet (Excel) to solve 10 problems provided on page 3) related to the cost of capital. You are requirod to show the following 3 steps for each problem (sample questions and solutions are provided for guidance): Describe and interpret the assumptions related to the problem. (in) Apply the appropriate mathematical model to solve the problems in) Cakulate the coerect solution to the problem Sample Questions and Solutions Sample Question A company is expected to pay a $3.50 dividend at year-end, the dividends are expected to grow ataconstant rate of 6.50% a year, and the common stock currently sells for S6250 a share. The before-tax cost of debt is 7.50%, and the tax rate is 4onu. The target capital structure consists or 40% debt and 60% common equity. Wist is the company's WACC if all equity is from retained camings? Solution The problem assumes the stock will have a constant growth of 6.5% forever. The constant growth model is appropriate to use for this problem. The accuracy of the solution depends on the correctness of the constant growth assumption. The cost of cquity assumes there will not be any new stock issuance. Therefore, cost of equity is the cost of retained canings for the existing shareholders The cost of debe should be on afler-tax basis due to the tax shield provided by the inicrest expense. (i) (i) The cost of oquity is based on the Sollowing: K-DPo his the current price to be calculated. D, is the next penod's dividend. * R is the required return on this stock gis the constant growth The cost of debt is based onk-1-T rdisthe before-tax cost ofdebt . T is the tax rate The WACC is based on: WACC-w w.k Cost ofretamed earnings-(35625) + 0.065-0.121 or 12.1% Cost of debt-7.5 x (1-0.4)-4.5% wACC-40.4x4. 5) + (0.6x 12J)-9.06% (iii) The average cost of capital for this company based on their existing debt and equity is 906%