Review the questions below and use the data provided in the question to solve the calculation. This assignment must be submitted as an Excel file.
Q1. 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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Q2. 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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Q3. What is XYZ's estimated cost of common equity using the CAPM approach?
Q4. 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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5. What is the bond-yield-plus-risk-premium estimate for XYZ's cost of common equity?
"Bond yield + RP" premium - 4%
market interest rate on XYZ's debt - 10%
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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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?
% Flotation cost - 15%
Net proceeds after flotation - $42.50
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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