my question is Q 2, book values vs market values. thank you!
X (1-1) - 2/3 X 10.84% + 1/3 X 9% X (1 - 35) = 9.177% 14.3 Because Watta uses bot weighted average flotat ause Watta uses both debt and equity to finance its operations, we first need the daverage flotation cost. As in the previous problem, the percentage of equity financing is 2/3, so the weighted average cost is: f. = (E/V) xfg+ (D/V) xf = 2/3 X 16% + 1/3 x 2% = 11.33% Wolla needs $30 million after flotation costs, then the true cost of the project is $30 million/(1-2) = $30 million/.8867 = $33.83 million CONCEPTS REVIEW AND CRITICAL THINKING QUESTIONS quity prob- 1. WACC [LO3] On the most basic level, if a firm's WACC is 12 percent, what does this mean? 2. Book Values versus Market Values (LO3) In calculating the WACC, if you had to use book values for either debt or equity, which would you choose? Why? 3. Project Risk (LO5] If you can borrow all the money you need for a project at 6 percent, doesn't it follow that 6 percent is your cost of capital for the project? 4. WACC and Taxes [LO3] Why do we use an aftertax figure for cost of debt but not for cost of equity? 5. DCF Cost of Equity Estimation (LO1] What are the advantages of using the DCF model for determining the cost of equity capital? What are the disadvantages? What specific piece of information do you need to find the cost of equity using this model? What are some of the ways in which you could get this estimate? 6. SML Cost of Equity Estimation (LO1] What are the advantages of using the SML ebt is n fora tatio otatica expected cine pieces of information are needed to use this method? Are all of these variables bservable, or do they need to be estimated? What are some of the ways in which you could get these estimates? of Debt Estimation LO2) How do you determine the appropriate cost of debt company? Does it make a difference if the company's debt is privately placed sed to being publicly traded? How would you estimate the cost of debt for a se only debt issues are privately held by institutional investors? pital (LO51 Suppose Tom O'Bedlam, president of Bedlam Products, ed you to determine the firm's cost of debt and cost of equity capital. for a company? Does it mo as opposed to being firm whose only debt Cost of Capital [LOS Inc., has hired you to det a. The stock currently probably be about $5. Tom argues, holders' money this yea Currently sells for $50 per share, and the dividend per share will ut $5. Tom argues, "It will cost us $5 per share to use the stock y this year, so the cost of equity is equal to 10 percent ($5/50)." What's wrong S wrong with this conclusion
