# MBA 520 Module Eight Cost of Capital Worksheet

July 6, 2016

**MBA 520 Module Eight Cost of Capital Worksheet in $15 only (Instant Download)**

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**Instruction:**

Please check which answers the best because I have 2 answered for these formulas.

Please select the best answer and put it in Ms Excel because my Professor wanted this work to be done with MS Excel showing how to add formulas to the cell so that she can see how we arrived at the answers. Please answer it in MS Excel document and show that you used the formula in right cell and how you arrived to the answer.

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.

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 calculations can inform your recommendations for your final project.

1. What is the market interest rate on XYZ’s debt and its component cost of debt?

Coupon rate

12%

Coupons per year

2

Years to maturity

15

Price

$1,153.72

Face value

$1,000

Tax rate

40%

Market Interest Rate =

Cost of Debt =

2. What is the firm’s cost of preferred stock?

Nominal dividend rate

10%

Dividends per year

4

Par value

$100

Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).

Boston, MA: Cengage Learning.

Price

$111.10

Cost of Preferred Stock =

3. What is XYZ’s estimated cost of common equity using the CAPM approach?

β

1.2

rRF

7%

RPM

6%

Estimated Cost of Common Equity =

4. What is the estimated cost of common equity using the DCF approach?

Price

$50

Current dividend

$4.19

Constant growth rate

5%

Estimated Cost of Common Equity =

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%

Bond-yield-plus-risk-premium estimate =

6. What is your final estimate for rs?

ESTIMAT

METHOD E

CAPM

14.20%

DCF

13.80%

rd + RP

14.00%

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?

% Flotation cost

15%

Net proceeds after flotation

$42.50

Cost of Newly Issued Common Stock

8. What is XYZ’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.

wd

30%

rd (1 – T) 6.00%

wp

10%

rp

9.00%

wc

60%

rs

14.00%

Answer:

Part 3

Ke = eRF + (RPMx beta)

= 7% + 6% x1.20

= 14.20%

(4) $50 = (4.19)*(1.05)/k – .05

=> 50k – 2.5 = 4.3995

=> k = 13.80%

(5) Answer is 4% + 10% = 14%

(6) 14.20%

(7)

(8) WACC = 11.1%

1.

What is the market interest rate on XYZ’s debt and its component cost of debt?

Coupon rate

12%

Coupons per year

2

Years to maturity

15

Price

$1,153.72

Face value

$1,000

Tax rate

40%

Market Interest Rate

= Using the financial calculator functions: n=30, PV= -1153.72, PMT=60, FV= 1000

CPT I/Y = 5 x 2 =

10% yearly market interest rate

Cost of Debt =

10(1-.40) =

6% cost of debt

2. What is the firm’s cost of preferred stock?

Nominal dividend rate

10%

Dividends per year

4

Par value

$100

Price

$111.10

Cost of Preferred Stock

= .1(100) / 111.10

= .090 or

9% cost of preferred stock

3. What is XYZ’s estimated cost of common equity using the CAPM approach?

β

1.2

r

RF

7%

RP

M

6%

Estimated Cost of Common Equity

= .07 + (.06)1.2

= .142 or

14.2 % Cost of Common Equity

4. What is the estimated cost of common equity using the DCF approach?

Price

$50

Current dividend

$4.19

Constant growth rate

5%

Estimated Cost of Common Equity =

4.19(1.05)/50 + .05 = .1379 or

13.8 % Cost of Common Equity

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%

Worksheet adapted from Brigham, E., & Houston, J. F. (2016).

Fundamentals of financial management

(14th ed.).

Boston, MA: Cengage Learning.

Bond-yield-plus-risk-premium estimate = .10 + .04 = .14 or

14 %Bond yield risk premium estimate

6. What is your final estimate for rs ?

METHOD

ESTIMATE

CAPM

14.20%

DCF

13.80%

rd+ RP

14.00%

Estimate

= 14.2 + 13.8 + 14 = 42 /3

= 14% cost of equity

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

Cost of Newly Issued Common Stock=

4.19(1.05)/50(1-.015) + .05

=4.40/42.50 + .05 = .1535 or

15.4 %

Cost of newly issued c. stock

8. What is XYZ’s overall, or weighted average, cost of capital (WACC)? Ignore flotation costs.

W

d

30%

r

d

(1 – T)

6.00%

w

p

10%

r

p

9.00%

w

c

60%

r

s

14.00%

=.3(.10)(.6) +.1(.09) +.6(.14) = .111

or

11.1 % WACC

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