Read the Mini-Case at the end of chapter 13. (pictured) And Calucualte the following:
1. Cost of equity using dividend discount model and the cost of preferred stock.
2. Cost of debt. Include both sources of debt.
3. The weight of each component (% of each).
4. WACC calculation.
5. Briefly discuss the difference in your calculation and the bosses calculation. Where did he go wrong?
MINICASE Bernice Mountaindog was glad to be back at Sea Shore Salt. cost of capital to other managers. The memo came as a surprise to Employees were treated well. When she had asked a year ago for a Bernice, so she stayed late to prepare for the questions that would leave of absence to complete her degree in finance, top manage- surely come the next day. ment promptly agreed. When she returned with an honors degree, Bernice first examined Sea Shore Salt's most recent balance she was promoted from administrative assistant (she had been sec- sheet, summarized in Table 13.6. Then she jotted down the follow- retary to Joe-Bob Brinepool, the president) to treasury analyst. ing additional points: Bernice thought the company's prospects were good. Sure, table salt was a mature business, but Sea Shore Salt had grown . The company's bank charged interest at current market rates, steadily at the expense of its less well known competitors. The and the long-term debt had just been issued. Book and market company's brand name was an important advantage, despite the values could not differ by much. difficulty most customers had in pronouncing it rapidly. But the preferred stock had been issued 35 years ago, when Bernice started work on January 2, 2016. The first 2 weeks went interest rates were much lower. The preferred stock, originally smoothly. Then Mr. Brinepool's cost of capital memo (see Figure issued at a book value of $100 per share, was now trading for only $70 per share. 13.2) assigned her to explain Sea Shore Salt's weighted-average MINICASE Bernice Mountaindog was glad to be back at Sea Shore Salt. cost of capital to other managers. The memo came as a surprise to Employees were treated well. When she had asked a year ago for a Bernice, so she stayed late to prepare for the questions that would leave of absence to complete her degree in finance, top manage- surely come the next day. ment promptly agreed. When she returned with an honors degree, Bernice first examined Sea Shore Salt's most recent balance she was promoted from administrative assistant (she had been sec- sheet, summarized in Table 13.6. Then she jotted down the follow- retary to Joe-Bob Brinepool, the president) to treasury analyst. ing additional points: Bernice thought the company's prospects were good. Sure, table salt was a mature business, but Sea Shore Salt had grown . The company's bank charged interest at current market rates, steadily at the expense of its less well known competitors. The and the long-term debt had just been issued. Book and market company's brand name was an important advantage, despite the values could not differ by much. difficulty most customers had in pronouncing it rapidly. But the preferred stock had been issued 35 years ago, when Bernice started work on January 2, 2016. The first 2 weeks went interest rates were much lower. The preferred stock, originally smoothly. Then Mr. Brinepool's cost of capital memo (see Figure issued at a book value of $100 per share, was now trading for only $70 per share. 13.2) assigned her to explain Sea Shore Salt's weighted-average
