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Cost of Capital Spreadsheet Example Module IX Name: Date: I Capital Structure 2,000,000 1,000,000 6,000,000 9,000,000 Bonds Preferred stock Common stock Total $ $ $ $ II-1 After-tax cost of bonds: II-2 Cost of retained earnings: weight cost I. The capital structure for 3C Corp is provi If the firm have a 5% after tax cost if debt, WACC =SUM(E9:E11) Semi-Annual YTM= Annual YTM= Cost of Bonds= DCF approach CAPM approach Average II-3 Cost of preferred stock II-4 Cost of New Common Stock II-5a Bonds Preferred Stock Retained earnings Total Amount II-5b Bonds Preferred Stock New Common Stock Total Amount Average beta= Weight Cost WACC Weight Cost WACC 2,000,000 1,000,000 6,000,000 9,000,000 2,000,000 1,000,000 6,000,000 9,000,000 Question ital structure for 3C Corp is provied below. The company plans to maintain it capital structure in the future . have a 5% after tax cost if debt, a 10% cost of preferred stock, a 20% cost of common stock, what is 3C's weighted cost of capital? II. Comprehensive Cost of Capital problem The Reiple Seven Systems. INC. (TSS) is staring its planning process for next year . Jack Tripper, The firm's CFO, calculates the weighted cost of capital each year to be used as a discount rate in the NPV analisis. You have been asked to help Mr. Tipper to compute the firm's cost of capital. you have collected the following data to do the job. a. Tss bonds carry a coupon rate of 6% with semi-annual payments. A $1000 par, a AAA rating and a maturit of 10 years The current price of the TSS bonds is $950 b. TSS preferred stock currently pays a 10% dividend rate on a $100 par value and has market value of $95 per share c. TSS common shares paied a dividend o f $5 last year. Devided have grown at a rate of 6% per year and are expected to continue for a foreseeable future The market price of the stock is $55 and thrre would be a floration cost of 5% on a new issue. Devided have grown at a rate of 6% per year and are expected to continue for a foreseeable future d. TSS's capital structure is as follows: Bonds( 2000 bonds outstanding) 2000,000 Preferred stock(10,000 shares outstadning) 1,000,000 Common stock (6000,000 share) 6,000,000 e. The firm's average tax rate is 35% and its marginal tax rate is 40% f. TSS uses five companies for peer group cpmparison. These five firms a long with their betas after being adjusted for financial leverage effected are as follows Peer Group Firms Beta Peer Group Firms Beta Western Pacific Telctroics 1.30 1.33 Southwestern INC Ecological System 1.26 1.18 g. treasury bond currently yield 3% (rRF) and the expected market return (rM) is 10% ASSIGNMENTS 1. Compute the after -tax cost of bonds 2. what is the cost of retained earnng, first based on the DCF approach and then based on the CAPM approach using an average beta of peer group as TSS beta Calculate the average of the two approaches 3. what is TSS cost of preferred stock? 4. Calculate the cost of new stock according to the DCF approach 5. Calculate tge weighted cost of capital for TSS assuming (a) only internal equity (retained earnings) is used on financing the equity portion of the new investment, and then (b) new common stock is issued to finance the form 's investments