Scribd Logo
Upload

Welcome to Scribd!

  • Calculate WACC using cost of debt, preferred stock and common stock

    Uploaded by

    Farhan Hasan
    80 views4 pages
    The document discusses the calculation of weighted average cost of capital (WACC). It defines the formulas to calculate the cost of debt, preferred stock, and common stock. It then shows an example calculation of WACC as the weighted average of cost of debt, preferred stock, and common stock. It also includes several questions and examples that further explain how to calculate WACC and costs of different components.

    Original Description:

    Cost of Capital Chapter 11 Answers

    Original Title

    Ch 11c Cost of Capital Solution

    Copyright

    © © All Rights Reserved

    Available Formats

    XLSX, PDF, TXT or read online from Scribd

    Did you find this document useful?

    Is this content inappropriate?

    Report this Document
    The document discusses the calculation of weighted average cost of capital (WACC). It defines the formulas to calculate the cost of debt, preferred stock, and common stock. It then shows an example calculation of WACC as the weighted average of cost of debt, preferred stock, and common stock. It also includes several questions and examples that further explain how to calculate WACC and costs of different components.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    80 views4 pages

    Calculate WACC using cost of debt, preferred stock and common stock

    Uploaded by

    Farhan Hasan
    The document discusses the calculation of weighted average cost of capital (WACC). It defines the formulas to calculate the cost of debt, preferred stock, and common stock. It then shows an example calculation of WACC as the weighted average of cost of debt, preferred stock, and common stock. It also includes several questions and examples that further explain how to calculate WACC and costs of different components.

    Copyright:

    © All Rights Reserved
    Download as XLSX, PDF, TXT or read online from Scribd
    Flag for inappropriate content
    of 4

    ST-1

    COST OF DEBT
    COST OF PREFERRED STOCK
    KdAT = KdBT (1 - T)
    Kps = Dps / Pps
    KdAT = 12 (1 - 0.4)
    Kps = 11 / (100 - 5)
    KdAT =
    7.20
    Kps =
    11.58
    COST OF COMMON STOCK
    Ks = Krf + (Km - Krf) bi
    Ks = {Do (1+g) / Po} + g
    Ks = 11 + (14 - 11) 1.51
    Ks = {3.60(1.09) / 60) + 0.09
    Ks =
    15.53
    Ks =
    15.54
    WACC = KdAT x Wd + Kps x Ws + Ks x Ws
    WACC = 7.20 x 0.25 + 11.58 x 0.15 + 15.54 x 0.60
    WACC =
    12.86

    Q.1

    WACC = KdAT x Wd + Ks x Ws
    9.96 = 5.4 x 0.4 + Ks x 0.6
    9.96 = 2.16 + 0.6 Ks
    0.6 Ks = 9.96 - 2.16
    0.6 Ks = 7.80
    Ks = 7.8 / 0.6
    Ks =
    13.00

    Q.2

    Kps = Dps / Pps


    Kps = 3.80 / (50 - 2.50)
    Kps =
    8.00

    Q.3

    Ks = (D1 / Po) + g
    Ks = (3.00 / 30) + 0.05
    Ks =
    15.00

    Q.4

    a)
    b)
    c)

    KdAT = KdBT (1 - T)
    KdAT = KdBT (1 - T)
    KdAT = KdBT (1 - T)

    KdAT = KdBT (1 - T)
    KdAT = 9 (1 - 0.4)
    KdAT =
    5.40

    Pps
    F%

    50 Fps = Pps x F% = 50 x 5%
    5% Fps =
    2.50

    KdAT = 13 (1 - 0)
    KdAT = 13 (1 - 0.20)
    KdAT = 13 (1 - 0.35)

    KdAT =
    KdAT =
    KdAT =

    13.00
    10.40
    8.45

    Par
    Dps%
    Pps
    F%

    Dps = Par x Dps% = 100 x 11%


    Dps =
    11.00
    Fps = Pps x F% = 97 x 5%
    Fps =
    4.85

    Q.5

    KdAT = KdBT (1 - T)
    KdAT = 12 (1 - 0.35)
    KdAT =
    7.80

    Q.6

    Kps = Dps / Pps


    Kps = 11 / (97 - 4.85)
    Kps =
    11.94

    Q.7

    YTM = [{30 + (1,000 - 515.16)/30 x 2} / {(1,000 + 515.16)/2}] X 100 x 2


    YTM =
    10.05
    KdAT = KdBT (1 - T)
    KdAT = 10.05 (1 - 0.40)

    100
    11%
    97
    5%

    KdAT =

    6.03

    Q.8

    a)
    b)
    c)
    d)

    Ks
    Ks
    Ks
    Ks

    Q.9

    a)

    PV = EPS 1996 =
    FV = EPS 2001 =

    b)
    c)
    Q.10

    Q.11

    a)

    a)
    b)

    c)
    Q.12

    a)

    b)

    =
    =
    =
    =

    (D1 / Po) + g
    Krf + (Km - Krf) bi
    Own Bond Yield + RP
    (16.30 + 15.40 + 16) / 3

    n
    Calculate for i=g
    D1 = Do (1 + g)
    Ks = (D1 / Po) + g

    Ks = (2.14 / 23) + 0.07


    Ks = 9 + (13 - 9) 1.6
    Ks = 12 + 4

    4.42
    6.50
    5
    D1 = 2.60 (1.08)
    Ks = (2.81 / 36) + 0.08

    Ks = (D1 / Po) + g
    0.09 = (3.60 / 60) + g
    0.09 = 0.06 + g
    g = 0.09 - 0.06
    g=
    3.00

    b)

    CE = 30,000,000 X 0.5 = 15,000,000


    WACC = KdAT x Wd + Ks x Ws
    WACC = 4.8 x 0.5 + 12 x 0.5
    WACC =
    8.40
    WACC would increase due to floatation cost
    WORKING
    PV = EPS 1992 =
    FV = EPS 2001 =

    6.50 = 4.42 (1+g)5


    g=
    D1 =
    Ks =

    EPS = 5.40 (1.03)


    EPS =
    5.562

    KdAT = KdBT (1 - T)
    KdAT = 8 (1 - 0.4)
    KdAT =
    4.80

    2.00
    4.00

    n
    9
    4.00 = 2.00 (1+g)9
    PV = EPS 1992 =
    g=
    EPS 2002 = EPS 2001 (1+g)
    EPS 2002 = 4.00 (1.08)
    EPS 2002 =
    4.32
    D1 = EPS2002 X 50%
    2.16
    Ks = (D1 / Po) + g
    KdAT = KdBT (1 - T)
    Ks = (2.16 / 50) + 0.08
    KdAT = 8 (1 - 0.4)
    Ks =
    12.32
    KdAT =
    4.80
    WACC = KdAT x Wd + Ks x Ws
    WACC = 4.8 x 0.3 + 12.32 x 0.7
    WACC =
    10.06

    F% = 50 x 5%

    Dps% = 100 x 11%

    F% = 97 x 5%

    Ks
    Ks
    Ks
    Ks

    =
    =
    =
    =

    16.30
    15.40
    16.00
    15.90

    50 = 4.42 (1+g)5
    8%
    2.81
    15.81

    00 = 2.00 (1+g)9
    8%

    You might also like