Excel Activity: Calculating the WACC Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars): Skye's earnings per share last year were $3.20. The common stock sells for $60.00, last year's dividend (D0) was $2.30, and a flotation cost of 10% woul be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 10%. Skye's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30.00 per share. The firm's before-tax cost of debt is 8%, and its marginal tax rate is 25%. The firm's currently outstanding 8% annual coupon rate, long-term debt sells at par value. The market risk premium is 6%, the risk-free rate is 7%, and Skye's beta is 1.732. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equais 31.65million. The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places. a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. After-tax cost of debt: Cost of preferred stock: Cost of retained earnings: Cost of new common stock: b. Now calculate the cost of common equity from retained eamings, using the CAPM method. c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between rs and rs as determined by the DCF method, and add that differential to the CAPM value for rs ) d. If Skye continues to use the same market-value capital structure, what is 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? (Hintz Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating wacc.) WACC1 : WACC 2 : Skye Computer Company: Balance Sheet as of December 31 (in thousands of dollars) 35 a. Calculating the cost of each capital component fusing the DCF methed to find 36 the cost of common equity) 37 Aflertax cost of dect 38 Cost of prelerred stock 39 Cost of rotained earings 40 Cost of new common slock 41 42 b. Calculating the cost of common equity from retained earnings, using the CAPM methed 43 Cost of retained eamings 44 45 c. Caiculating the cost of new common slock based on the CAPM 46. Flotation cost adustment 47. Cost of new oommon stock 4h 49. d. Caleulating the fim's WACC assuming that (1) if uses only retained earnings for equily and 50 (2) it it expands so rapidly that it must lasue new commen stock \begin{tabular}{|l|l|} \hline 51 & \\ 52. Tolai debt \\ \hline 53 & Prelered stock \\ 54 Conmon equily \\ 55. Tola \end{tabular} 50 ST 50C1 5s Wh WACC 3 Market value (in thousands) Weight Market value (in thousandu)
