FINS20: Corporate Finance Chapter 13: Risk, Cost of Capital and Capital Budgeting Comprehensive illustrative Example on WACC Before-tax cost of debt Tax rate 8% 34% 532.00 (B-Tr Price of Preferred stock (after deducting floatation costs) Dividend per share of Preferred Current price of Common stock Dividend paid in the recent past for Common Growth rate Stock Beta Market risk premium, (MRP) Risk free rate (rr) Flotation cost for common stock Weight of debt in the target capital structure Weight of preferred stock in the target capital structure $52.00 $2.50 6% 0.81 62% 5.5% 5% 10% 50% Required Calculate the cost of debt (after tax cost of debt), cost of preferred stock the cost of equity (ignoring flotation costs) with the DCF method and the CAPM method. Relevant equations from chapter 13 1. Cost of Common Equity: (A) CAPM: R- Note: RM-R)Market Risk Premium (B) DDM: R= R- 2. Cost of Preferred stock: 3. Cost of Debt: a. Cost of debt is calculated as before-tax and after-tax. Before tax calculation is the same as the YTM calculation (will show you an example in class) YTM can be calculated using TVM on a financial calculator. b. Coverting before tax cost of debt into after-tax cost of debt: After-tax cost of debt- Before-tax cost of debt *(1-Tax rate)