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What components make up the cost of capital, i.e., what factors are found in the WACC calculation?

10-2 Basic Definitions for WACC Calculations

Explain why the term ?(1-T)? is included in the WACC calculation.

10-2-1 Overview of Case: Coleman

A company currently plans a capital structure comprised of preferred stock with a weight of 30% and common stock with a weight of 40%. They also say that to achieve their target tax shield goal they need to have a weight of debt at 70%.

Comment on whether this is feasible and if not, why not?

10-3 Cost of Debt

Calculate the annual after-tax cost (in dollars) of debt given the following information:

The firm has 20,000 bonds issued, each with $1,000 par value. (Recall that the coupon interest paid is equal to the par value times the coupon rate.)

The coupon rate paid on the bonds is 5%. (This is the interest expense on the bonds.)

The corporate tax rate is 35%.

10-4 Cost of Preferred Stock

The cost of preferred stock is determined to be 5%. The price of the preferred stock was $54/share. What was the dividend per share paid out to a holder of this preferred stock?

10-5 Cost of Retained Earnings

What is the cost of keeping a portion of a firm?s earnings as retained earnings rather than paying the earnings out as a dividend?

10-5a CAPM Approach

Calculate the cost of equity financing given the following:

Risk-free rate: 1%

Market risk premium: 7%

Beta: 1.25

10-5b Bond-Yield-Plus-Risk-Premium Approach

The return on a bond is 4% while the return on common is 5%. What is the risk premium?

10-5c DCF Approach

Solve for required return given the following:

The dividend paid at the beginning of the first time period (D0) was $4/share. The dividend grows in perpetuity at 3.5% (growth rate g). The price of the stock (P0) is $39/share.

10-5d Averaging the Alternative Estimates

The average rate of return on a stock was calculated to be 18.4%. The DCF method yielded 21%, while the rd +RP method yielded 14%. What estimate did the CAPM yield?

10-6 Cost of New Common Stock

Can a firm expect capital from issuance of new shares to cost more or less than using retained earnings? Explain your answer.

10-7 Composite WACC

Calculate the WACC (report using x.x% format) given the follow information, assuming a tax rate of 30%:

wd: 20%

rd: 7%

wp: 20%

rp: 8%

wc: 60%

rs: 12%

10-9 Adjusting the Cost of Capital for Risk

What could be assumed about a company?s propensity for risk given a lower-than-industry-average WACC?

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