Estimate the firms after-tax cost for long debt. Why do analysts use the after-tax measure in the calculation of a firms cost of capital?

Calculate SCRPCs cost for preferred stock. Why is there not a tax adjustment?

What is SCRPCs cost of capital when the firm has to issue new common stock and the Gordon Model estimate is used?

Calculate SCRPCs cost of capital when retained earnings is the source of common stock financing and the Gordon Model estimate is used. Use current market values of the financial instruments to determine the components weights (see Exhibit VI).

Estimate the cost for common stock using the Gordon Model (dividend valuation model), Capital Asset Pricing Model, and Bond Stock Premium Approach.

Exhibit I: Excerpts from Breez's Notes from His Cost of Capital Research 1. The cost of capital is really the required rate of return or hurdle rate that a firm should use to evaluate capital budgeting projects of average risk. 2. The cost of capital is a weighted average of the required return for each financing source. The weights should be based on market values and should be representative of the firm's optimal capital mix. 3. All debt should not be included. Spontaneous sources like accruals and accounts payable should not be counted. Notes ble should only be included ifthe firm is using bank loans as a nent source of long-term financin Exhibit II: Historical Estimates of Yearly Returns on Certain Investments: 1926 2004 Arithmetic Return 12.39% 5.82% 3.76% 3.12% 6.57% 8.63% Investment Common Stocks Long-term Government Bonds T-Bills Inflation Historic Equity Premium (Gov. Bonds Historic Equity Premium (Gov. Bills Geometric Return 10.43% 5.44% 3.72% 3.04% 4.99% 6.71% Standard Deviation 20.32 9.30 3.14 4.32 Source: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation, Valuation Edition, 2006 Yearbook. Exhibit III: SCRPC's EPS and DPS Information Year EPS S1.72 $1.84 S2.85 S3.25 Change (% DPS S0.92 S0.96 1.01 1.06 S1.10 S1.16 $1.22 1% 2007 2008 2009 2010 2011 2012 2013 Projected 3.98 54.89 14.04 4.00 0.96 6.35 4.34 5.50 4.95 3.77 5.45 5.17 S3.15 S3.35 Exhibit IV: SCRPC's Balance Sheet Information ($O00s) BOOK Accounts Payable Accruals and Other Current Liabilities Notes Payable (for working capital) TOTAL CURRENT LIABILITIES S120,124 64,111 58,125 242,360 Long-term Debt TOTAL LIABILITIES 275,000 517,360 Preferred Stock (par $100) Common Equity (S1 par) Excess of Par Retained Earnings TOTAL LIABILITIES AND EQUITY 5,000 10,000 40,000 458,445 1,030,805 Exhibit V: Market, Industry, and SCRPC's Financial Information Treasury Bill Rate Long-term Government Bond Yield Long-term Corporate Bond Yield Average Beta for Indus SCRPC S Beta Average P/E Ratio for Indust SCRPC" S Recent P/E Ratio Recent Price of SCRPC's Common Stock SCRPC's Tax Rate SCRPC's Bond Risk Premium 4.25% 7.45% 8.75% 1.25 1.45 13.50 10.75 S36.01 40% 4.0% SCRPC's Bond's are selling at $910 with a Coupon. Rate of 7.25 and maturity of 14 years. Floatation costs for the bonds would be S5 per bond. SCRPC's preferred stock ($100 par) pays a $14 dividend and is selling for $110. The firm would have a $5 floatation cost if it sold preferred stock today. If SCRPC sold additional common stock, the floatation cost and the decline in value would be about 20% of the current price. Exhibit VI: Find the WACC (using Retained Earnings) omponentAfter Tax Cost Market Value (000's) Weight Contribution Notes Payable Bonds Preferred Stock Common Stock TOTAL Exhibit VII: Find the WACC (using New Common Stock) Market Value (000's) Component After tax Cost Weight Contribution Notes Payable Bonds Preferred Stock Common Stock TOTAL Exhibit I: Excerpts from Breez's Notes from His Cost of Capital Research 1. The cost of capital is really the required rate of return or hurdle rate that a firm should use to evaluate capital budgeting projects of average risk. 2. The cost of capital is a weighted average of the required return for each financing source. The weights should be based on market values and should be representative of the firm's optimal capital mix. 3. All debt should not be included. Spontaneous sources like accruals and accounts payable should not be counted. Notes ble should only be included ifthe firm is using bank loans as a nent source of long-term financin Exhibit II: Historical Estimates of Yearly Returns on Certain Investments: 1926 2004 Arithmetic Return 12.39% 5.82% 3.76% 3.12% 6.57% 8.63% Investment Common Stocks Long-term Government Bonds T-Bills Inflation Historic Equity Premium (Gov. Bonds Historic Equity Premium (Gov. Bills Geometric Return 10.43% 5.44% 3.72% 3.04% 4.99% 6.71% Standard Deviation 20.32 9.30 3.14 4.32 Source: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation, Valuation Edition, 2006 Yearbook. Exhibit III: SCRPC's EPS and DPS Information Year EPS S1.72 $1.84 S2.85 S3.25 Change (% DPS S0.92 S0.96 1.01 1.06 S1.10 S1.16 $1.22 1% 2007 2008 2009 2010 2011 2012 2013 Projected 3.98 54.89 14.04 4.00 0.96 6.35 4.34 5.50 4.95 3.77 5.45 5.17 S3.15 S3.35 Exhibit IV: SCRPC's Balance Sheet Information ($O00s) BOOK Accounts Payable Accruals and Other Current Liabilities Notes Payable (for working capital) TOTAL CURRENT LIABILITIES S120,124 64,111 58,125 242,360 Long-term Debt TOTAL LIABILITIES 275,000 517,360 Preferred Stock (par $100) Common Equity (S1 par) Excess of Par Retained Earnings TOTAL LIABILITIES AND EQUITY 5,000 10,000 40,000 458,445 1,030,805 Exhibit V: Market, Industry, and SCRPC's Financial Information Treasury Bill Rate Long-term Government Bond Yield Long-term Corporate Bond Yield Average Beta for Indus SCRPC S Beta Average P/E Ratio for Indust SCRPC" S Recent P/E Ratio Recent Price of SCRPC's Common Stock SCRPC's Tax Rate SCRPC's Bond Risk Premium 4.25% 7.45% 8.75% 1.25 1.45 13.50 10.75 S36.01 40% 4.0% SCRPC's Bond's are selling at $910 with a Coupon. Rate of 7.25 and maturity of 14 years. Floatation costs for the bonds would be S5 per bond. SCRPC's preferred stock ($100 par) pays a $14 dividend and is selling for $110. The firm would have a $5 floatation cost if it sold preferred stock today. If SCRPC sold additional common stock, the floatation cost and the decline in value would be about 20% of the current price. Exhibit VI: Find the WACC (using Retained Earnings) omponentAfter Tax Cost Market Value (000's) Weight Contribution Notes Payable Bonds Preferred Stock Common Stock TOTAL Exhibit VII: Find the WACC (using New Common Stock) Market Value (000's) Component After tax Cost Weight Contribution Notes Payable Bonds Preferred Stock Common Stock TOTAL