1 2

Face Value - Issue Price

Yield to Maturity = Coupon + Years to Maturity
Issue Price x 60% + FV x 40%

1000 - 925
Yield to Maturity = 88 + 25
925 x 60% + 1000 x 40%

Yield to Maturity = 88 + 3
555 + 400

Yield to Maturity = 91
955

Yield to Maturity = 9.53%

After tax cost of debt

Kd = 9.53% x (1-30%)

Kd = 9.53% x 70%

Kd = 6.67%
1

Kp = 100 x 10%
95 - 2.5

Kp = 10
92.5

Kp = 10.81%
 CASE A
D1 D1
Ke = + G Kn = + G
P0 P0 - FC

4.5 4.5
Ke = + 6% Kn = + 6%
60 60 - 4

4.5
Ke = 0.075 + 6% Kn = + 6%
56

Ke = 13.50% Kn = 0.0804 + 6%

Kn = 14.04%

CASE B

Ke = D1 + G Kn = D1 + G
P0 P0 - FC

3.27 3.27
Ke = + 9% Kn = + 9%
60 60 - 3.5

3.27
Ke = 0.0545 + 9% Kn = + 9%
56.5

Ke = 14.45% Kn = 0.0579 + 9%

Kn = 14.79%
D1 = D0 X (1 + G)

D1 = 3 x (1 + 9%)

D1 = 3 x 109.00%

D1 = 3.27
Cost of Capital = RF + [β x (MR - RF)]

Cost of Capital = 8% + [0.80 x (12% - 8%)]

Cost of Capital = 8% + [0.8 x 4%]

Cost of Capital = 8% + 3.20%

Cost of Capital = 11.20%

Source Cost Weight WACC
Debt 6.50% 35% 2.28%
Preferred Stock 10.00% 15% 1.50%
Common Stock 13.50% 50% 6.75%
100% 10.53%

Source Cost Weight WACC

Debt 6.00% 40% 2.40%
Preferred Stock 8.00% 20% 1.60%
Common Stock
New Stock 12.00% 30% 3.60%
Retained Earning 10.00% 10% 1.00%
100% 8.60%