12.3. What is the cost of Equity? Calculate the cost of equity, using the CAPM o
ID: 2654997 • Letter: 1
Question
12.3. What is the cost of Equity? Calculate the cost of equity, using the CAPM or the dividend growth model. (Show work, one answer is enough, but you can complete):
RE (CAPM) =
RE (Dividend Growth) =
RE (average) =
12.5. What is the cost of preferred stock? (Show work):
RP =
12.6. Cost of Debt (Try a bond calculator for this problem. Solve for YTM.)
a. Pretax cost of debt:
b. Aftertax cost of debt:
Which is more relevant and why:
12.15. Find the WACC. Hint notice that we don’t include the (1 – TC) term in the WACC equation. We use the aftertax cost of debt in the equation, so the term is not needed here. Begin by finding the market value of each type of financing. MVD, MVE, MVP, the total market value of the firm, the cost of equity using the CAPM, the cost of debt is the YTM of the bonds, the aftertax cost of deb, the cost of preferred stock. (Show work):
WACC =
13.1. EBIT and Leverage
a. Calculate EPS and the changes in the EPS under the 3 scenarios. Hint: The EPS is the net income divided by the 6,250 shares outstanding.
1. Recession
a. EPS =
b. Change =
2. Normal
a. EPS =
b. Change = no change
3. Expansion
a. EPS =
b. Change =
b. Recalculate if the company undergoes the proposed recapitalization. Hint: find the number of shares the company will repurchase and the interest payment each year (it will be the same interest each year). Subtract the Net interest from the EBIT. Calculate the changes:
1. Recession
a. EPS =
b. Change =
2. Normal
a. EPS =
b. Change = no change
3. Expansion
a. EPS =
b. Change =
Explanation / Answer
Solution:
12.5. What is the cost of preferred stock?
Cost of Preferred Stock = Preferred Dividend / Market Priceof Preference Shares
= $ 6.25 / $ 108
= 5.79 %
12.6. Cost of Debt
a. Pretax cost of debt: = 6.1 % / 2 = 3.05 %
b. Aftertax cost of debt: = 3.05 % ( 1 - .38) =1.891 %
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