8

.docx
School
University of Texas, Arlington **We aren't endorsed by this school
Course
FINA 3313
Subject
Finance
Date
Oct 16, 2023
Pages
4
Uploaded by hymmnal on coursehero.com
This is a preview
Want to read all 4 pages? Go Premium today.
Already Premium? Sign in here
8.1.1 The Cost of Equity Financing A stock plans a dividend of $8.00 per period, has a growth rate of 2% and a price of $50.00. What is the cost of equity? A firm has a beta of 1.3, the expected return on the market is 12%, and the risk-free rate is 5%. What is the cost of equity? Mavs Inc. wishes to determine its cost of common stock equity, rs . The market price, P 0, of its common stock is $35.86 per share. The firm expects to pay a dividend, D 1, of $4.20 at the end of the coming year, 2021. The dividends paid on the outstanding stock over the past 6 years (2015- 2020) were as follows: The cost of equity is computed as shown below: = (D1 / current price) + growth rate growth rate is computed as follows: = (Dividend in year 2020 / Dividend in year 2015) 1 / n - 1 = ($ 4.10 / $ 3.60) 1 / 5 - 1 = 0.026351854 So, the cost of equity will be as follows: = ($ 4.20 / $ 35.86) + 0.026351854 = 14.35% Approximately
Spanolia LLC is estimating its WACC. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sell for 1,000 USD. The firm's marginal tax rate is 40 percent. What is the after-tax cost of debt? Answer in % terms to 2 decimal places w/o the % sign. Using Texas Instrument BA 2 plus calculator SET N = 40, PV = -1000, FV = 1000, PMT = 60 CPT --> I/Y = 6.00% YTM = 2 * I/Y YTM = 2 * 6.00% YTM = 12.00% Before tax cost of debt = 12.00% After tax cost of debt = Before tax cost of debt * (1 - Tax rate) After tax cost of debt = 12.00% * (1 - 40%) After tax cost of debt = 7.20% LUVFINANCE, Inc. is estimating its WACC. The firm could sell, at par, $100 preferred stock that pays a 10 percent annual dividend and incurs 4.32% flotation costs. What is the cost of new preferred stock financing? Answer in % format to 2 decimal places w/o % sign. The cost of preferred stock is computed as shown below: = Annual dividend / [ Price x (1 - flotation cost) ] = 100 x 10% = 10 = $ 10 / [ $ 100 x (1 - 0.0432) ] = $ 10 / $ 95.68 = 10.45% Approximately Compute the weight of common equity that should be used in the firm's WACC calculation if the market value of the firm's debt is $59 million, the market value of the firm's preferred stock is $7 million and the market value of the firm's common equity is $111 million. Enter your answer as a decimal (i.e. 0.54) Weight of common equity: = Common Equity/(Debt+Preferred Stock+Common Equity) = 111/(59+7+111) = 0.63
Preston Corp. is estimating its WACC. Its target capital structure is 20 percent debt, 20 percent preferred stock, and 60 percent common equity. Its bonds have a 12 percent coupon, paid semiannually, a current maturity of 20 years, and sells for $1,100. The firm could sell, at par, $100 preferred stock which pays a 5.42 percent annual dividend, but flotation costs of 5 percent would be incurred. Preston's beta is 1.2, the risk-free rate is 3 percent, and the market risk premium is 5 percent. The firm's marginal tax rate is 40 percent. What is Preston's WACC? Cost of Equity: = risk free rate+beta*market risk premium =3%+1.2*5% =9% cost of preferred stock = annual dividend/(price-floation cost) =(5.42%)/(100-5%) = 5.42/(100-5) = .0571 = 5.71% cost of debt N = 20 *2 = 40 PV = -1100 FV = 1000 PMT = 1000 * 12% = 120/2 = 60.00 CPT I/Y = 5.3861 *2 = 10.7722% cost of debt after tax=10.77%*(1-40%) = .107722 * (1- .4) = .0646 = 6.46 % What is Preston's WACC =Weight of equity*cost of equity+weight of preferred stock*cost of preferred stock+weight of debt*cost of debt*(1-tax rate) =60%*9%+20%*5.71%+20%*6.46% = .6 * .09 + .2 * .0571 + .2 * .0646 =1.39% (answer)
Why is this page out of focus?
Because this is a Premium document. Subscribe to unlock this document and more.
Page1of 4
Uploaded by hymmnal on coursehero.com