Calculate the weights of capital components based on the book value balance sheet Weight of each source = Book value of source / Total book value of liabilities & equity weight of debt: Wd weight of preferred stock: Wp weight of total common equity: We Current assets $2,000 Net fixed assets 3,000 Total assets $5,000 Total debt $2,100 Preferred stock 250 Common stock 1,300 Retained earnings 1,350 Total common equity $2,650 Total liabilities & equity $5,000 The firm's marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate long-term debt sells at $1,051.11. The debt matures in 7 years. Coupon interest is paid semiannually. Skye's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30 per share. Skye's earnings per share last year were $3.20. The common stock sells for $55.00, last year’s dividend (D0) was $2.10, and a flotation cost (i.e, f ) 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%. The market risk premium is 5%, the risk-free rate is 6%, and Skye's beta is 1.516.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Calculate the weights of capital components based on the book value
| Weight of each source = Book value of source / Total book value of liabilities & equity |
| weight of debt: Wd |
| weight of |
| weight of total common equity: We |
| Current assets | $2,000 | |
| Net fixed assets | 3,000 | |
| Total assets | $5,000 | |
| Total debt | $2,100 | |
| Preferred stock | 250 | |
| Common stock | 1,300 | |
| |
1,350 | |
| Total common equity | $2,650 | |
| Total liabilities & equity | $5,000 |
The firm's marginal tax rate is 35%. The firm's currently outstanding 10% annual coupon rate long-term debt sells at $1,051.11. The debt matures in 7 years. Coupon interest is paid semiannually.
Skye's preferred stock pays a dividend of $3.30 per share, and its preferred stock sells for $30 per share.
Skye's earnings per share last year were $3.20. The common stock sells for $55.00, last year’s dividend (D0) was $2.10, and a flotation cost (i.e, f ) 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%.
The market risk premium is 5%, the risk-free rate is 6%, and Skye's beta is 1.516.
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