WEIGHTS COST OF EQUITY 1. Dividend Growth Model (DGM) Approach DO/D1? 1.2 G 3% PO 18 Required Return/Cost of Equity 2. SML Approach Risk-free rate Beta E(Rm)-Rf E(Rstock)/Cost of Equity 2% 0.8 8% Stock Price Bond Price 18 Stocks outstanding 500,000 EQUITY 1067 Bonds outstanding 2,500 DEBT VALUE OF FIRM Weight of Equity Weight of Debt COST OF DEBT You can modify N, calculate PMT in this column. 15 years 11% 1,067 1,000 Semiannual-Coupon Payment Bond N Coupon Rate Price Face Rate - Period Rate YTM - Before-tax Cost of Debt Tax Rate After-tax Cost of Debt WACC - Based on SML Approach (Use E6 for cost of equity) Remember the formula: WACC=Cost of Equity x Weight of Equity + After-tax Cost of Debt x Weight of Debt where you use E(Rstock) for Cost of Equity WACC - Based on Dividend Growth Model (Use B6 for Cost of Equity) Remember the formula: WACC=Cost of Equity x Weight of Equity + After-tax Cost of Debt x Weight of Debt where you use Required Return for Cost of Equity 21% Question Discoverit! Company has just paid $1.2 dividend payment and they promise to increase dividend payments by 3%. The current stock price is $18 and has 500,000 outstanding shares. Calculate cost of equity, based on DGM. The company has a beta of 0.8 and market risk premium is 8%. Risk free rate is 2%. Calculate cost of equity, based on SML. Discoverit! has only one bond outstanding with a maturity period of 15 years. The bond makes semiannual coupon payments and the coupon rates is 11%. The selling price of the bond is $1,067 and face is $1,000. The tax rate is 21% and the company has 2,500 bonds outstanding. Calculate before and after-tax cost of debt. Calculate WACC using SML approach to calculate Cost of Equity. Calculate WACC using Dividend Growth Model approach to calculate Cost of Equity