Module Eight Cost of Capital Worksheet
The assignment in this module builds on the idea of forecasting and valuation theory from Chapters 6 and 7 in Module Six by valuing a company through calculations using real data. This will strengthen your recommendation in the final project by giving you the means to provide evidence from a financial analysis. This assignment is worth a total of 100 points. See the points distribution listed with each question.
Prompt
Review the questions below and use the data provided in the question to solve the calculation. As you work through each equation, think about where the data for your company may be found to make the same calculations and how the information from these calculation can inform your recommendations for your final project. Use the non-graded discussion board in this module to ask questions of your peers to inform your responses to the questions below. This assignment must be submitted as an Excel file.
1. What is the market interest rate on XYZ's debt and its component cost of debt?
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Coupon rate
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12%
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Coupons per year
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2
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Years to maturity
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15
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Price
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$1,153.72
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Face value
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$1,000
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Tax rate
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40%
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Market Interest Rate =
Cost of Debt =
2. What is the firm's cost of preferred stock?
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Nominal dividend rate
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10%
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Dividends per year
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4
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Par value
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$100
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Price
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$111.10
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Cost of Preferred Stock =
3. What is XYZ's estimated cost of common equity using the CAPM approach?
Estimated Cost of Common Equity =
4. What is the estimated cost of common equity using the DCF approach?
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Price
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$50
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Current dividend
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$4.19
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Constant growth rate
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5%
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Estimated Cost of Common Equity =
5. What is the bond-yield-plus-risk-premium estimate for XYZ's cost of common equity?
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"Bond yield + RP" premium
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4%
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market interest rate on XYZ's debt
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10%
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Bond-yield-plus-risk-premium estimate =
6. What is your final estimate for rs?
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METHOD
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ESTIMATE
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CAPM
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14.20%
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DCF
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13.80%
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rd + RP
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14.00%
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Estimate =
7. XYZ estimates that if it issues new common stock, the flotation cost will be 15%. XYZ incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued common stock, considering the flotation cost?
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% Flotation cost
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15%
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Net proceeds after flotation
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$42.50
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Cost of Newly Issued Common Stock
8. What is XYZ's overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.
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wd
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30%
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rd (1 - T)
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6.00%
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wp
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10%
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rp
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9.00%
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wc
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60%
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rs
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14.00%
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