Please help solve 1,2 and 5
roject Risk 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? WACC and Taxes Why do we use an aftertax figure for cost of debt but not for cost of equit? SML Cost of Equity Estimation If you use the stock beta and the security market line to compute the iscount rate for a project, what assumptions are you implicitly making? ML Cost of Equity Estimation What are the advantages of using the SML approach to finding the cost of equity capital? What are the disadvantages? What are the specific pieces of information needed to use this method? Are all of these variables observable, or do they need to be estimated? What are some of the ways in which you could get these estimates? 1. P of equity? 3. 4. S 5. Cost of Debt Estimation How do you determine the appropriate cost of debt for a company? Does it make a difference if the company's debt is privately placed as opposed to being publicly traded? How would you estimate the cost of debt for a firm whose only debt issues are privately held by institutional investors? 6. Cost of Capital Suppose Tom O'Bedlam, president of Bedlam Products, Inc., has hired you to determine the firm's cost of debt and cost of equity capital. stock currently sells for $50 per share, and the dividend per share will probably be about $5 Tom argues, "It will cost us $5 per share to use the stockholders' money this year, so the cost of equity is equal to 10 percent ($5/50)." What's wrong with this conclusion? 8 b. Base d on the most recent financial statements, Bedlam Products' total liabilities are $8 million. Total interest expense for the coming year will be about $1 million. Tom therefore reasons, owe $8 million, and we will pay $1 million interest. Therefore, our cost of debt is obviously million/8 million 12.5 percent." What's wrong with this conclusion? CHAPTER 12 Risk, Cost a roject Risk 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? WACC and Taxes Why do we use an aftertax figure for cost of debt but not for cost of equit? SML Cost of Equity Estimation If you use the stock beta and the security market line to compute the iscount rate for a project, what assumptions are you implicitly making? ML Cost of Equity Estimation What are the advantages of using the SML approach to finding the cost of equity capital? What are the disadvantages? What are the specific pieces of information needed to use this method? Are all of these variables observable, or do they need to be estimated? What are some of the ways in which you could get these estimates? 1. P of equity? 3. 4. S 5. Cost of Debt Estimation How do you determine the appropriate cost of debt for a company? Does it make a difference if the company's debt is privately placed as opposed to being publicly traded? How would you estimate the cost of debt for a firm whose only debt issues are privately held by institutional investors? 6. Cost of Capital Suppose Tom O'Bedlam, president of Bedlam Products, Inc., has hired you to determine the firm's cost of debt and cost of equity capital. stock currently sells for $50 per share, and the dividend per share will probably be about $5 Tom argues, "It will cost us $5 per share to use the stockholders' money this year, so the cost of equity is equal to 10 percent ($5/50)." What's wrong with this conclusion? 8 b. Base d on the most recent financial statements, Bedlam Products' total liabilities are $8 million. Total interest expense for the coming year will be about $1 million. Tom therefore reasons, owe $8 million, and we will pay $1 million interest. Therefore, our cost of debt is obviously million/8 million 12.5 percent." What's wrong with this conclusion? CHAPTER 12 Risk, Cost a
