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    ASSIGNMENT COST OF CAPITAL - Chapter 14 - Resti Aulia - 1182003031

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    Faydil Iman
    This document contains the name and student number of Resti Aulia who is completing an assignment for Corporate Finance. The document provides solutions to 9 questions related to calculating costs of equity, debt, and the weighted average cost of capital. Formulas and calculations are shown to find the required rates of return.

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    ASSIGNMENT COST OF CAPITAL - Chapter 14 - Resti Aulia - 1182003031

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    Faydil Iman
    107 views4 pages
    This document contains the name and student number of Resti Aulia who is completing an assignment for Corporate Finance. The document provides solutions to 9 questions related to calculating costs of equity, debt, and the weighted average cost of capital. Formulas and calculations are shown to find the required rates of return.

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    This document contains the name and student number of Resti Aulia who is completing an assignment for Corporate Finance. The document provides solutions to 9 questions related to calculating costs of equity, debt, and the weighted average cost of capital. Formulas and calculations are shown to find the required rates of return.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    107 views4 pages

    ASSIGNMENT COST OF CAPITAL - Chapter 14 - Resti Aulia - 1182003031

    Uploaded by

    Faydil Iman
    This document contains the name and student number of Resti Aulia who is completing an assignment for Corporate Finance. The document provides solutions to 9 questions related to calculating costs of equity, debt, and the weighted average cost of capital. Formulas and calculations are shown to find the required rates of return.

    Copyright:

    © All Rights Reserved
    Download as DOCX, PDF, TXT or read online from Scribd
    Download as docx, pdf, or txt
    of 4

    Nama : Resti Aulia

    NIM : 1182003031
    Assignment Corporate Finance

    Solution :

    1. It is the minimum rate of return the firm must earn overall on its existing assets. If it earns
    more than this, value is created.
    2. Book values for debt are likely to be much closer to market values than are equity book
    values.
    3. No. The cost of capital depends on the risk of the project, not the source of the money.
    4. Interest expence is tax-deductible. There is no difference between pretax and aftertax equity
    costs.
    Solution :

    1. With the information given, we can find the cost of equity using the dividend growth model.
    Using this model, the cost of equity is :
    RE = [$2.40(1.055)/$52] + .055 = .1037 or 10.37%

    2. Here we have information to calculate the cost of equity using the CAPM. The cost of equity
    is :
    RE = .053 + 1.05(.12 – .053) = .1234 or 12.34%

    3. Here we have information available to calculate the cost of equity using the CAPM and the
    dividend growth model. Using the CAPM, we find :
    RE = .05 + 0.85(.08) = .1180 or 11.80%

    And using the dividend growth model, the cost of equity is :


    RE = [$1.60(1.06)/$37] + .06 = .1058 or 10.58%

    Both estimates of the cost of equity seem reasonable. If we remember the historical return
    on large capitalization stocks, the estimate from the CAPM model is about two percent
    higher than average, and the estimate from the dividend growth model is about one percent
    higher than the historical average, so we cannot definitively say one of the estimates is
    incorrect. Given this, we will use the average of the two, so :
    RE = (.1180 + .1058) / 2 = .1119 or 11.19%

    4. The use the dividend growth model, we first need to find the growth rate in dividends. So,
    the increase in dividends each year was :
    G1 = ($1.12 – 1.05) / $1.05 = .0667 or 6.67%
    G2 = ($1.19 – 1.12 ) / $1.12 = .0625 or 6.25%
    G3 = ($1.30 – 1.19) / $1.19 = .0924 or 9.24%
    G4 = ($1.43 – 1.30) / $1.30 = .1000 or 10.00%
    So, the average arithmetic growth rate in dividends was :
    g = (.0667 + .0625 + .0924 + .1000) / 4 = .0804 or 8.04%

    Using the growth rate in the dividend growth model, we find the cost equity is :
    RE = [$1.43(1.0804)/$45.00] + .0804 = .1147 or 11.47%

    Calculating the geometric growth rate in dividends, we find :


    $1.43 = $1.05 (1 + g)4
    G = .0803 or 8.03%

    The cost of equity using the geometric dividend growth rate is :


    RE = [$1.43 (1.0803) / $45] + .0803 = .1146 or 11.46%

    5. The cost of preferred stock is the dividend payment divided by the price, so :
    RP = D1/P0
    RP = 6/96
    RP = .0625 or 6.25%
    6. P0 = 1.070 , 35 PMT , 1000 FV , 30N
    Solve for i/y, 3,137%
    YTM = 2 x 3.3137% = 6,27%
    And aftertax cost of debt is :
    RD = .0627 (1 – .35) = .0408 or 4.08%

    7. a) The pretax cost of debt is the YTM of the company’s bonds, so :


    P0 = 950, 40 PMT, 1000 FV
    Solve for i/y, 4.249%
    YTM = 2 x 4.249% = 8.50%
    b) The after tax cost of debt is :
    RD = .0850 (1 - .35) = .0552 or 5.52%
    c) The after tax rate is more relevant because that is the actual cost to the company

    8.
    9. a) Using the equation to calculate the WACC :
    WACC = (.60 x .14) + (.05 x .06) + (.35 x .08) (1 - .35) = .1052 or 10.52 %
    b) Since the interest is tax deductible and dividends are not, we must look at the after tax
    cost of debt , wich is :
    .08 (1 - .35) = .0520 or 5.20%
    Hence, on an after tax basis, debt is cheaper than the preferred stock

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