11-6 COST OF COMMON EQUITY

The future earnings, dividens, and common stock price of Carpetto Technologies Inc. are
expected to grow 7% per year. Carpetto’s common stock currently sells for $23.00 per share;
its last dividend was $2.00; and it will pay a $2.14 dividend at the end of the current year.

Jawab:
Diketahui data sebagai berikut:
g = 7%
P0 = $23.00
D0 = $2.00
D1 = $2.14

a. Using the DCF approach, what is its cost of common equity?

D1 2.14
r s= + g= +7 %=16.3 %
P0 23.00

b. If the firm’s beta is 1.6, the risk-free rate is 9%, and the average return on the market is
13%, what will be the firm’s cost of common equity using the CAPM approach?

r s=r RF + ( r M −r RF ) b=9 % + ( 13 %−9 % ) 1.6=15.4 %

c. If the firm’s bonds earn a return of 12%, based on the bond-yield-plus-risk-premium

approach, what will be rs? Use the midpoint of the risk premium range discussed in
Section 11-5 in your calculations.

rs = Bond yield + Risk premium = 12% + 4% = 16%

d. If you have equal confidence in the inputs used for the three approaches, what is your
estimate of Carpetto’s cost of common equity?

Estimasi cost of common equity dapat dihitung dengan rata-rata dari ketiga metode
tersebut yaitu:

(16.3% + 15.4% + 16%) / 3 = 15.9%

11-7 COST OF COMMON EQUITY WITH AND WITHOUT FLOTATION

The Evanec Company’s next expected dividend, D1, is $3.18; its growth rate is 6%; and its
common stock now sells for $36.00. New stock (external equity) can be sold to net $32.40
per share.

Jawab:

Diketahui data sebagai berikut:

D1 = $3.18
g = 6%
P0 = $36.00
Pe = $32.40

a. What is Evanec’s cost of retained earnings, rs?

D1 3.18
r s= + g= +6 %=14.83 %
P0 36.00

b. What is Evanec’s percentage flotation cost, F?

Pe = P0(1 – F)

$32.4 = $36(1 – F)

$32.4 = $36 – $36F

$36F = $36 – $32.4

F = 3,6 / 36

F = 10%

c. What is Evanec’s cost of new common stock, re?

D1
re= +g
P0 (1−F )

3.18
re= +6 %
36(1−0.1)

3.18
re= +6 %
36(1−0.1)

2
 r e =9.81% +6 %

r e =15.81 %

11-11 WACC AND PERCENTAGE OF DEBT FINANCING

Hook Industries’s capital structure consist solely of debt and common equity. It can issue
debt at rd = 11%, and its common stock currently pays a $2.00 dividend per share (D 0 =
$2.00). The stock’s price is currently $24.75, its dividend is expected to grow at constant rate
of 7% per year, its tax rate is 35%, and its WACC is 13.95%. What percentage of the
company’s capital structure consists of debt?

Diketahui:
rd = 11%
D0 = $2.00
P0 = $24.75
g = 7%
T = 35%
WACC = 13.95%
Ditanyakan:
Persentase struktur modal yang terdiri dari utang (wd)
Jawab:

WACC =wd r d ( 1−T )+ w c r s

2 ×1.07
13.95 %=w d 11 % ( 1−0.35 ) + wc +7 %
24.75

13.95 %=w d 7.15 %+ wc ( 8.65% +7 % )

13.95 %=w d 7.15 %+ wc 15.65 % … . Persamaan 1

100 %=w d + wc …. Persamaan2 (Struktur modal perusahaan hanya terdiri dari debt dan
common equity)
w d =100 %−wc

Maka,

13.95 %=w d 7.15 %+ wc 15.65 %

13.95 %=(100 %−w¿¿ c )7.15 %+ w c 15.65 % ¿

3
13.95 %=7.15 %−7.15 %wc +w c 15.65 %

6.8 %=−7.15 %w c + wc 15.65 %

6.8 %=−7.15 %w c + wc 15.65 %

6.8 %=8.5 %w c

w c =80 %

Dengan demikian, wd = 100% - wc

= 100% - 80%

= 20%

Jadi, persentase struktur modal yang terdiri dari utang (wd) adalah sebesar 20%.

4
11-18 WACC AND OPTIMAL CAPITAL BUDGET

Adam Corporation is considering four average-risk projects with the following costs and rates
of return:

Project Cost Expected Rate of Return

1 $2,000 16.00%
2 3,000 15.00
3 5,000 13.75
4 2,000 12.50

The company estimates that it can issue debt at a rate of rd = 10%, and its tax rate is 30%. It
can issue prefered stock that pays a constant dividend of $5.00 per year at $49.00 per share.
Also, its common stock currently sells for $36.00 per share; the next expected dividend, D1, is
$3.50; and the dividend is expected to grow at a constant rate of 6% per year. The target
capital structure consists of 75% common stock, 15% debt, and 10% preferred stock.

a. What is the cost of each of the capital components?

Cost of Debt
= rd (1-T)
= 10% (1-30%)
= 0.1 (1-0.3)
= 0.1 x 0.7
= 0.07
= 7%

Cost of Preferred Stock

rp = DP / PP
= $5.00 / $49.00
= 0.102
= 10.2%

Cost of Retained Earnings

rs = (D1 / P0) + g
= ($3.50 / $36.00) + 6%
= 0.097 + 0.06

5
 = 0.157
= 15.7%
b. What is Adam’s WACC?
WACC = wd rd (1-T) + wp rp + wc rs
= (0.15 x 0.07) + (0.10 x 0.102) + (0.75 x 0.157)
= 0.0105 + 0.0102 + 0.11775
= 0.13845
= 13.845%

c. Only projects with expected returns that exceed WACC will be accepted. Which projects
should Adams accept?
Project yang sebaiknya diterima oleh Adams Corporation adalah Project 1 dan 2 karena
expected rate of returnnya melebihi WACC.