y U D L, 10 prelerreu To structure the task somewhat, Jones has asked you to answer the fonown questions ( What sources of capital should be included when you estimate Fans Davis's weighted average cost of capital (WACC)? Should the component costs be figured on a before-tax or an after-tax (3) Should the costs be historical (embedded) costs or new (marginal) cos What is the market interest rate on Harry Davis's debt and its component of debt? (1) What is the firm's cost of preferred stock? (2) Harry Davis's preferred stock is riskier to investors than its debu preferred's vield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake? (Hint: Think about taxes.) d. (1 What are the two primary ways companies raise common equity! (2) Why is there a cost associated with reinvested earnings? (3) Harry Davis doesn't plan to issue new shares of common stock. Using the CAPM approach, what is Harry Davis's estimated cost of equity? e (What is the estimated cost of equity using the discounted cash flow (DCF) approach? (2) Suppose the firm has historically earned 15% on equity (ROE) and retained 35% of earnings, and investors expect this situation to continue in the future. How could you use this information to estimate the future dividend growth rate, and what growth rate would you get? Is this con- sistent with the 5% growth rate given earlier? (3) Could the DCF method be applied if the growth rate was not constant? How? What is the cost of equity based on the bond-yield-plus-risk-premium method? What is your final estimate for the cost of equity, r.? What is Harry Davis's weighted average cost of capital (WACC)? What factors influence a company's WACC? Should the company use the composite WACC as the hurdle rate for each of its divisions? What procedures are used to determine the risk-adjusted cost of capital for a particular division? What approaches are used to measure a division's beta? Harry Davis is interested in establishing a new division, which will focus pri- marily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that stand-alone firms involved in similar projects have on average the following characteristics . Their capital structure is 10% debt and 90% common equity . Their cost of debt is typically 12%. The beta is 1.7. Given this information what would your estimate be for the division's cost of capital? y U D L, 10 prelerreu To structure the task somewhat, Jones has asked you to answer the fonown questions ( What sources of capital should be included when you estimate Fans Davis's weighted average cost of capital (WACC)? Should the component costs be figured on a before-tax or an after-tax (3) Should the costs be historical (embedded) costs or new (marginal) cos What is the market interest rate on Harry Davis's debt and its component of debt? (1) What is the firm's cost of preferred stock? (2) Harry Davis's preferred stock is riskier to investors than its debu preferred's vield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake? (Hint: Think about taxes.) d. (1 What are the two primary ways companies raise common equity! (2) Why is there a cost associated with reinvested earnings? (3) Harry Davis doesn't plan to issue new shares of common stock. Using the CAPM approach, what is Harry Davis's estimated cost of equity? e (What is the estimated cost of equity using the discounted cash flow (DCF) approach? (2) Suppose the firm has historically earned 15% on equity (ROE) and retained 35% of earnings, and investors expect this situation to continue in the future. How could you use this information to estimate the future dividend growth rate, and what growth rate would you get? Is this con- sistent with the 5% growth rate given earlier? (3) Could the DCF method be applied if the growth rate was not constant? How? What is the cost of equity based on the bond-yield-plus-risk-premium method? What is your final estimate for the cost of equity, r.? What is Harry Davis's weighted average cost of capital (WACC)? What factors influence a company's WACC? Should the company use the composite WACC as the hurdle rate for each of its divisions? What procedures are used to determine the risk-adjusted cost of capital for a particular division? What approaches are used to measure a division's beta? Harry Davis is interested in establishing a new division, which will focus pri- marily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that stand-alone firms involved in similar projects have on average the following characteristics . Their capital structure is 10% debt and 90% common equity . Their cost of debt is typically 12%. The beta is 1.7. Given this information what would your estimate be for the division's cost of capital