Calculate the cost of each capital component that is the after tax cost of debt the cost of preferred stock the cost of equity from retained earnings and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. Now calculate the cost of common equity from retained earnings, using the CAPM method What is the cost of new common stock based on the CAPM?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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Calculating the WACC 2016 balance sheet.

Current assets.               2,000

Net fixed assets.          -3,000

Total assets.              -5,000

Accounts payable and accrual.  900

Short term debt.      100

Long term debt.        1,100

Preferred stock (10,000 shares).  250

Common stock (50,000 shares)   1,300

Retained earning   1,350

Total common equity.  2,650

Total liabilities and equity. 5,000

Sky earning per share last year were 3.20. The common stock sells for 55.00, last year dividend do was 2.10 and flotation cost of 10% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 9% sky preferred stock pays a dividend of 3.30 per share and its preferred stock sells for 30.00 per share. The firm before tax cost of debt is 10% and its marginal tax rate is 35% the firm current outstanding 10% annual coupon rate is 6% and sky beta is 1.516. The firm total bent which is the sum of the company short-term debt and long term debt equal 1.2 million

Calculate the cost of each capital component that is the after tax cost of debt the cost of preferred stock the cost of equity from retained earnings and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.

Now calculate the cost of common equity from retained earnings, using the CAPM method

What is the cost of new common stock based on the CAPM? 

If sky continues to use the same market value capital structure what is the firms WACC assuming that it uses only retained earnings for equity? If it expand so rapidly that it must issue new common stock?

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