Question

INSTRUCTIONS: Answer the following questions, using spreadsheet financial functions to do the calculations. Use the following information about SV Inc. to calculate the companys Cost of Capital.

The stock of SV Inc. sells for $50, and last years dividend was $2.10.

A flotation cost of 10% would be required to issue new common stock.

SVs preferred stock pays a dividend of $3.30 per share, and new preferred could be sold at a price to net the company $30 per share.

Security analysts are projecting that the common dividend will grow at a rate of 7% a year.

The firm can issue additional long-term debt at an interest rate (or a before-tax cost) of 10%, and its marginal tax rate is 35%. The market risk premium is 6%, the risk-free rate is 6.5%, and Supreme Ventures beta is 0.83.

In its cost-of-capital calculations, SV Inc. uses a target capital structure with 45% debt, 5% preferred stock, and 50% common equity.

REQUIRED: SECTION A Calculate the cost of each capital component: i. the after-tax cost of debt ii. the cost of preferred stock (including flotation costs) iii. the cost of equity (ignoring flotation costs). Use both the DCF(DGM) method and the CAPM method to find the cost of equity.