THE COST OF CAPITAL

Accounting and Finance

PRA MBA 81C

Dosen pengampu:
Ratna Nurhayati, S.E. M.Com.Ak. CA. PhD.

Disusun Oleh:
Sheila Syifanur Rosyida (22/498906/NEK/26554)
Rachmat Fazil Isda (22/498907/NEK/26555)
Iskandar (22/498913/NEK/26558)
Wismayanti Ginasari (22/498931/NEK/26566)
Mujaddidul Amri (22/498954/NEK/26575)
Mohammad Iqbal Baihaqi Aminuddin (22/499000/NEK/26593)

PROGRAM STUDI MAGISTER MANAJEMEN

FAKULTAS EKONOMIKA DAN BISNIS
UNIVERSITAS GADJAH MADA
YOGYAKARTA
2022
11-6
Cost Of Common Equity
The future earnings, dividends, 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.

Given:
g = 7% P0 = $23.00 per share
D0= $2.00 D1 = $2.14

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

𝐷1
Cost of Common Equity = rs = 𝑃0
+ 𝑔
$ 2.14
= $ 23
+ 7%
= 9,30 % + 7%
= 16,30%

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?
given:
b = 1,6 rFR = 9% rm = 13%

rs = rFR + (rm - rFR) b

= 9% + (13% - 9%) 1,6
= 9% + 6,4%
= 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.
given:
Bond yield = 12% Risk premium = 4% (page 414)

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?

Based on the calculation of the cost of common equity using the three methods, it
is found that the cost of common equity is in the range of 15.4%-16.3%. With the same
level of confidence in the calculations of the three methods, the cost of common equity
used in the WACC calculation is calculated using the weighted average value of the three
methods. So the Cost of Common Equity Carpetto is 15.9% ( (16.3% + 15.4% + 16%) /
3)).
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.

Given:
D1 = $3.18
g = 6%
Po = $36.00
New stock (external equity) = $32.40/ share (P1)

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

𝐷1
rs = 𝑃0
+ 𝑔
$ 3.18
= $36.00
+ 6%
= 8,83% + 6%
= 14,83%

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

F = (P0-P1) / P0
= (36 - 32,4) / 36
= 3,6 / 36
= 10%

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

re = {(D1) / P0 (1 - F)} + g
= {3,18 / 36 (1 - 10%)} + 6%
= 3,18 / 32,4 + 6%
= 9,814% + 6%
= 15,814%
18-11
WACC AND PERCENTAGE OF DEBT FINANCING
Hookd Industries’s capital structure consists 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 (Do =
$2.00). The stock's price is currently $24,75, its dividend is expected to grow at a 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 :
Capital Structure hanya dari Debt dan Common Equity
WACC = 13,95%
Rd = 11%
Do = $2.00
Stock Price = $ 24,75
Growth = 7%
T = 35%
Wc =?
Rs = ? (dengan data yang ada, pendekatan menggunakan DCF)

Formula :
WACC = (%debt)(ATCOD) + (%Pref. Stock)(COPS) + (%comm. equity)(COCE)
WACC = Wd Rd (1-T) + Wp Rp + Wc Rs
WACC = Wd Rd (1-T) + 0 + Wc Rs
WACC = Wd Rd (1-T) + (1 - Wd) (D1/Po) + g
WACC = Wd Rd (1-T) + (1 - Wd) (Do.(1+g)/Po) + g

Answer :
WACC = Wd Rd (1-T) + (1 - Wd) (Do.(1+g)/Po) + g
13,95% = (Wd) . 11% (1-35%) + (1 - Wd) ($2.00 . (1+7%) / $24,75) + 7%
0.1395 = (Wd) 0.11 (0.65) + (1 - Wd) (2. (1.07) / 24,75) + 0.07
0.1395 = (0.0715 Wd) + 0.1565 - (0.1565 Wd)
0,1395 - 0.1565 = (0.0715 - 0,1565) Wd
-0.017 = -0.085 Wd
Wd = 0.017/0.085
Wd = 0,2
Wd = 20%0
18-18
WACC AND OPTIMAL CAPITAL BUDGET
Adams 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 preferred 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, adn 10% preferred stock.
a. What is the cost of each of the capital components?
b. What is Adams’s WACC?
c. Only projects with expected returns that exceed WACC will be accepted. Which projects
should Adams accept?

ANSWER
a. After-tax cost of debt = before-tax cost of debt (1 - Tax rate)
= 10% ( 1 - 30%)
= 10% ( 70%)
= 7%
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑓𝑜𝑟 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠𝑡𝑜𝑐𝑘
cost of preferred stock = 𝑃𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑝𝑟𝑒𝑓𝑒𝑟𝑟𝑒𝑑 𝑠𝑡𝑜𝑐𝑘
5
= 49
= 0.102 atau 10.2%
𝐷𝑖𝑣𝑖𝑑𝑒𝑛𝑑 𝑓𝑜𝑟 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘
Cost of common equity = 𝐶𝑢𝑟𝑟𝑒𝑛𝑡 𝑝𝑟𝑖𝑐𝑒 𝑜𝑓 𝑡ℎ𝑒 𝑐𝑜𝑚𝑚𝑜𝑛 𝑠𝑡𝑜𝑐𝑘
+ growth rate
3.50
= 36
+6%
= 0,0972 + 0,06
= 0,1572 atau 15,72%

b. WACC = (Weight of debt) (After-tax cost of debt) + (Weight of preferred stock) (Cost of
preferred stock) + (Weight of common equity) (Cost of common equity)
= (15%) (7%) + (10%) (10,2%) + (75%) (15,72%)
= 1,05% + 1,02% + 11,79%
= 13,86%

c. Since the WACC of Adams Corporation is 13,86%, Adams should accept project 1 that has
16% rate of return, and project 2 that has 15% rate of return.