Calculating the WACC
Skye Computer Company: Balance Sheet as of December 31
(in thousands of dollars)
	2021
Current assets	$1,400
Net fixed assets	2,600
Total assets	$0
Accounts payable and accruals	$600
Short-term debt	100
Long-term debt	900
Preferred stock	300
Common stock	1,025
Retained earnings	1,075
Total common equity	$0
Total liabilities and equity	$0
Last year's earnings per share	$3.05
Current price of common stock, P0	$45.00
Last year's dividend on common stock, D0	$2.35
Growth rate of common dividend, g	10%
Flotation cost for common stock, F	11%
Common stock outstanding	50,000
Current price of preferred stock, Pp	$35.00
Dividend on preferred stock, Dp	$3.15
Preferred stock outstanding	10,000
Before-tax cost of debt, rd	12%
Market risk premium, rM - rRF	6%
Risk-free rate, rRF	7%
Beta	1.682
Tax rate	25%
Total debt	$1,000	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