Calculating the WACC
Skye Computer Company: Balance Sheet as of December 31
(in thousands of dollars)
	2021
Current assets	$2,000
Net fixed assets	3,000
Total assets	$5,000
Accounts payable and accruals	$700
Short-term debt	200
Long-term debt	1,850
Preferred stock	400
Common stock	900
Retained earnings	950
Total common equity	$1,850
Total liabilities and equity	$5,000
Last year's earnings per share	$2.60
Current price of common stock, P0	$50.00
Last year's dividend on common stock, D0	$1.70
Growth rate of common dividend, g	10%
Flotation cost for common stock, F	11%
Common stock outstanding	40,000
Current price of preferred stock, Pp	$30.00
Dividend on preferred stock, Dp	$2.70
Preferred stock outstanding	15,000
Before-tax cost of debt, rd	10%
Market risk premium, rM - rRF	5%
Risk-free rate, rRF	6%
Beta	1.384
Tax rate	25%
Total debt	$2,050	thousand
a. Calculating the cost of each capital component (using the DCF method to find
the cost of common equity)				Formulas
After-tax cost of debt				#N/A
Cost of preferred stock				#N/A
Cost of retained earnings				#N/A
Cost of new common stock				#N/A
b. Calculating the cost of common equity from retained earnings, using the CAPM method
Cost of retained earnings				#N/A
c. Calculating the cost of new common stock based on the CAPM
Flotation cost adjustment				#N/A
Cost of new common stock				#N/A
d. Calculating 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
	Market value (in thousands)	Weight		Market value (in thousands)	Weight
Total debt				#N/A	#N/A
Preferred stock				#N/A	#N/A
ommon equity				#N/A	#N/A
Total				#N/A	#N/A
WACC1				#N/A
WACC2				#N/A