Answered step by step
Verified Expert Solution
Link Copied!

Question

1 Approved Answer

The Instructions is the first page and the chart you're supposed to use is the second to answer the first page Weighted Average Cost of

The Instructions is the first page and the chart you're supposed to use is the second to answer the first pageimage text in transcribedimage text in transcribed

Weighted Average Cost of Capital Calculations For this exercise, assume such data as you need such as interest expense, relevant bond data, preferred and common stock dividends, and the information provided below Cost of Debt: Step 1: Calculate the cost of debt = kd using the bond formula . Step 2: Calculate the after-tax cost of debt, kd' by multiplying koby (1-Tx) where Tx is the interest expense divided by taxable income (obtained from the income statement). Cost of Preferred Stock: Step 3: Calculate the cost of preferred stock using the valuation formula (D/Pp). Cost of Equity: Step 4: Calculate the cost of equity using the Gordon constant growth rate model [i=(D./Po) + 5). Assumed Capital Structure Step 5: Using a capital structure of $100 units, calculate the respective weight for each of the capital components. For example: Weights Debt = $30 units (30/100) = 3 =Wd (10/100) = 1 = W, Preferred stock = 10 units Common stock = 60 units (60/100) = .6 = We Total Capital = $100 units Step 6: Calculate the weighted average cost of capital by their respective weights and summing the products. ROIC TREE COGS/Sales Depreciation Sales EBIT/ Sales in SGA Expenseli Sales Pretax ROIC ROIC Sales/ Invested Capital Operating working capital/l Sales Net PPE / Sales Cash tax rate on EBIT L Other assets/ Sales Weighted Average Cost of Capital Calculations For this exercise, assume such data as you need such as interest expense, relevant bond data, preferred and common stock dividends, and the information provided below Cost of Debt: Step 1: Calculate the cost of debt = kd using the bond formula . Step 2: Calculate the after-tax cost of debt, kd' by multiplying koby (1-Tx) where Tx is the interest expense divided by taxable income (obtained from the income statement). Cost of Preferred Stock: Step 3: Calculate the cost of preferred stock using the valuation formula (D/Pp). Cost of Equity: Step 4: Calculate the cost of equity using the Gordon constant growth rate model [i=(D./Po) + 5). Assumed Capital Structure Step 5: Using a capital structure of $100 units, calculate the respective weight for each of the capital components. For example: Weights Debt = $30 units (30/100) = 3 =Wd (10/100) = 1 = W, Preferred stock = 10 units Common stock = 60 units (60/100) = .6 = We Total Capital = $100 units Step 6: Calculate the weighted average cost of capital by their respective weights and summing the products. ROIC TREE COGS/Sales Depreciation Sales EBIT/ Sales in SGA Expenseli Sales Pretax ROIC ROIC Sales/ Invested Capital Operating working capital/l Sales Net PPE / Sales Cash tax rate on EBIT L Other assets/ Sales

Step by Step Solution

There are 3 Steps involved in it

Step: 1

blur-text-image

Get Instant Access to Expert-Tailored Solutions

See step-by-step solutions with expert insights and AI powered tools for academic success

Step: 2

blur-text-image

Step: 3

blur-text-image

Ace Your Homework with AI

Get the answers you need in no time with our AI-driven, step-by-step assistance

Get Started

Recommended Textbook for

Handbook Of Financial Markets Dynamics And Evolution

Authors: Thorsten Hens

1st Edition

0323165478, 978-0323165471

More Books

Students also viewed these Finance questions

Question

What is a business risk?

Answered: 1 week ago

Question

Evaluating Group Performance?

Answered: 1 week ago