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Cost of Capital Worksheet The assignment in this module builds on the idea of forecasting and valuation theory from Chapters 6 and 7 in Module Six by valuing a company through calculations using real data. This will strengthen your recommendation in the final project by giving you the means to provide evidence from a financial analysis. Prompt Review the questions below and use the data provided in the question to solve the calculation. As you work through each equation, think about where the data for your company may be found to make the same calculations and how the information from these calculation can inform your recommendations for your final project. 1. What is the market interest rate on XYZ's debt and its component cost of debt? Coupon rate 12% Coupons per year 2 Years to maturity 15 Price $1,153.72 Face value $1,000 Tax rate 40% Market Interest Rate = Cost of Debt = 2. What is the firm's cost of preferred stock? Nominal dividend rate 10% Dividends per year 4 Par value $100 Price $111.10 Cost of Preferred Stock = 3. What is XYZ's estimated cost of common equity using the CAPM approach? 1.2 rRF 7% RPM 6% Estimated Cost of Common Equity = 4. What is the estimated cost of common equity using the DCF approach? Price $50 Current dividend $4.19 Constant growth rate 5% Estimated Cost of Common Equity = 5. What is the bond-yield-plus-risk-premium estimate for XYZ's cost of common equity? "Bond yield + RP" premium 4% market interest rate on XYZ's debt 10% Bond-yield-plus-risk-premium estimate = 6. What is your final estimate for rs? METHOD ESTIMATE CAPM 14.20% DCF 13.80% rd + RP 14.00% Estimate = 7. XYZ estimates that if it issues new common stock, the flotation cost will be 15%. XYZ incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost? % Flotation cost 15% Net proceeds after flotation $42.50 Cost of Newly Issued Common Stock 8. What is XYZ's overall, or weighted average, cost of capital (WACC)? Ignore flotation costs. wd 30% rd (1 - T) 6.00% wp 10% rp 9.00% wc 60% rs 14.00% Solution-1 Coupon rate Coupons per year Years to Maturity Price Face value Tax rate N PV PMT FV B-T rd A-T rd 12% 2 15 $1,153.72 $1,000 40% 30 $1,153.72 $60 $1,000 10.0% 6.0% Solution-2 Nominal dividend rate Dividends per year Par value Price rp 10% 4 $100 $111.10 9.00% Solution-3 rRF RPM rS 1.2 7% 6% 14.20% Solution-4 Price Current dividend Constant growth rate D1 rs $4.40 13.80% $50 $4.19 5% Solution-5 "Bond yield + RP" premium ks = 4% 14.00% Solution-6 METHOD CAPM DCF rd + RP Average ESTIMATE 14.20% 13.80% 14.00% 14.00% Solution-7 % Flotation cost 15% A-F proceeds from issue rs $42.50 15.35% Solution-8 wd wp ws 30% 10% 60% A-T rd rp rs 6.00% 9.00% 14.00% WACC = 11.10% Solution-1 Coupon rate Coupons per year Years to Maturity Price Face value Tax rate N PV PMT FV B-T rd A-T rd 12% 2 15 $1,153.72 $1,000 40% 30 $1,153.72 $60 $1,000 10.0% 6.0% Solution-2 Nominal dividend rate Dividends per year Par value Price rp 10% 4 $100 $111.10 9.00% Solution-3 rRF RPM rS 1.2 7% 6% 14.20% Solution-4 Price Current dividend Constant growth rate D1 rs $4.40 13.80% $50 $4.19 5% Solution-5 "Bond yield + RP" premium ks = 4% 14.00% Solution-6 METHOD CAPM DCF rd + RP Average ESTIMATE 14.20% 13.80% 14.00% 14.00% Solution-7 % Flotation cost 15% A-F proceeds from issue rs $42.50 15.35% Solution-8 wd wp ws 30% 10% 60% A-T rd rp rs 6.00% 9.00% 14.00% WACC = 11.10%