Start with the partial model in the file Ch11 P18 Build a Model.xlsx. The stock of Gao Computing sells for $60, and last year's dividend was $3.17. Security analysts are projecting that the common dividend will grow at a rate of 8% a year. A flotation cost of 12% would be required to issue new common stock. Gao's preferred stock sells for $32.97, pays a dividend of $2.70 per share, and new preferred stock could be sold with a flotation cost of 9%. The firm has outstanding bonds with 25 years to maturity, a 10% annual coupon rate, semiannual payments, and $1,000 par value. The bonds are trading at $1,214.82. The tax rate is 25%. The market risk premium is 6%, the risk-free rate is 6.5%, and Gao's beta is 1.2. In its cost- of-capital calculations, Gao uses a target capital structure with 40% debt, 15% preferred stock, and 45% common equity. The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places. Download spreadsheet Ch11 P18 Build a Model-f184b4.xlsx a. Calculate the cost of each capital component-in other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the CAPM method and the dividend growth approach to find the cost of equity. After-tax cost of debt Cost of preferred stock (including flotation costs) Cost of common equity, dividend growth approach (ignoring flotation costs) Cost of common equity, CAPM 9 % 9 % 13.7 % 13.7 % b. Calculate the cost of new stock using the dividend growth approach. 14.48 % c. Assuming that Gao will not issue new equity and will continue to use the same target capital structure, what is the company's WACC? 8.98 %
Start with the partial model in the file Ch11 P18 Build a Model.xlsx. The stock of Gao Computing sells for $60, and last year's dividend was $3.17. Security analysts are projecting that the common dividend will grow at a rate of 8% a year. A flotation cost of 12% would be required to issue new common stock. Gao's preferred stock sells for $32.97, pays a dividend of $2.70 per share, and new preferred stock could be sold with a flotation cost of 9%. The firm has outstanding bonds with 25 years to maturity, a 10% annual coupon rate, semiannual payments, and $1,000 par value. The bonds are trading at $1,214.82. The tax rate is 25%. The market risk premium is 6%, the risk-free rate is 6.5%, and Gao's beta is 1.2. In its cost- of-capital calculations, Gao uses a target capital structure with 40% debt, 15% preferred stock, and 45% common equity. The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places. Download spreadsheet Ch11 P18 Build a Model-f184b4.xlsx a. Calculate the cost of each capital component-in other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the CAPM method and the dividend growth approach to find the cost of equity. After-tax cost of debt Cost of preferred stock (including flotation costs) Cost of common equity, dividend growth approach (ignoring flotation costs) Cost of common equity, CAPM 9 % 9 % 13.7 % 13.7 % b. Calculate the cost of new stock using the dividend growth approach. 14.48 % c. Assuming that Gao will not issue new equity and will continue to use the same target capital structure, what is the company's WACC? 8.98 %
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
Section: Chapter Questions
Problem 1PS
Related questions
Question
need help with after cost of debt and part c
Transcribed Image Text:Start with the partial model in the file Ch11 P18 Build a Model.xlsx. The stock of Gao Computing sells for $60, and last year's dividend was $3.17. Security analysts are projecting
that the common dividend will grow at a rate of 8% a year. A flotation cost of 12% would be required to issue new common stock. Gao's preferred stock sells for $32.97, pays a dividend
of $2.70 per share, and new preferred stock could be sold with a flotation cost of 9%. The firm has outstanding bonds with 25 years to maturity, a 10% annual coupon rate, semiannual
payments, and $1,000 par value. The bonds are trading at $1,214.82. The tax rate is 25%. The market risk premium is 6%, the risk-free rate is 6.5%, and Gao's beta is 1.2. In its cost-
of-capital calculations, Gao uses a target capital structure with 40% debt, 15% preferred stock, and 45% common equity.
The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate
calculations. Round your answers to two decimal places.
Download spreadsheet Ch11 P18 Build a Model-f184b4.xlsx
a. Calculate the cost of each capital component-in other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring
flotation costs). Use both the CAPM method and the dividend growth approach to find the cost of equity.
After-tax cost of debt
Cost of preferred stock (including flotation costs)
Cost of common equity, dividend growth approach
(ignoring flotation costs)
Cost of common equity, CAPM
b. Calculate the cost of new stock using the dividend growth approach.
9 × %
9
%
13.7
%
13.7
%
14.48
%
c. Assuming that Gao will not issue new equity and will continue to use the same target capital structure, what is the company's WACC?
8.98 %
Transcribed Image Text:1 WACC
2
B
0
D
E
F
3 Current price of common stock, Po
4 Last year's dividend on common stock, Do
5 Growth rate of common dividend, g
6 Flotation cost for common stock
7 Current price of preferred stock, Pps
8 Preferred dividend, Dps
9 Flotation cost for preferred stock
10 Bond's years to maturity
11 Number of coupon payment per year
12 Annual coupon rate
13 Par value
14 Bond price
15 Tax rate
16 Market risk premium, RPM
17 Risk-free rate, f
18 Beta
19 Weight of long-term debt, wa
20 Weight of preferred stock, Wps
21 Weight of common stock, w
22
23 a. Calculating the cost of each capital component
24 Annual before-tax cost of debt
25 After-tax cost of debt
26 Cost of preferred stock (including flotation costs)
$60.00
$3.17
8%
12%
$32.97
$2.70
9%
25
2
10%
$1,000.00
$1,214.82
25%
6.0%
6.5%
27 Cost of common equity, dividend growth approach (ignoring flotation costs)
28 Cost of common equity, CAPM
29
30 b. Calculating the cost of new stock using the dividend growth approach
31 Cost of new stock, dividend growth approach
32
1.2
40%
15%
45%
Formulas
8.20% =RATE(B10 B11,-B12 B13,B14,-B13)
30.00% =B19" (1-B15)
9.00% =B8/(B7*(1-B9))
13.70% =((B4*(1+B5))/B3)+B5
13.70% =B17+(B18*B16)
14.48% =((B4*(1+B5))/(B3*(1-B6)))+B5
33 c. Calculating the company's WACC if Gao will not issue new equity and will continue to use the same target capital structure
34 WACC
58233.55% (B13*B19)+(B14*B20)+(B15*B21)
35
36
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
This is a popular solution!
Trending now
This is a popular solution!
Step by step
Solved in 3 steps with 3 images
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Recommended textbooks for you
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Essentials Of Investments
Finance
ISBN:
9781260013924
Author:
Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:
Mcgraw-hill Education,
Foundations Of Finance
Finance
ISBN:
9780134897264
Author:
KEOWN, Arthur J., Martin, John D., PETTY, J. William
Publisher:
Pearson,
Fundamentals of Financial Management (MindTap Cou…
Finance
ISBN:
9781337395250
Author:
Eugene F. Brigham, Joel F. Houston
Publisher:
Cengage Learning
Corporate Finance (The Mcgraw-hill/Irwin Series i…
Finance
ISBN:
9780077861759
Author:
Stephen A. Ross Franco Modigliani Professor of Financial Economics Professor, Randolph W Westerfield Robert R. Dockson Deans Chair in Bus. Admin., Jeffrey Jaffe, Bradford D Jordan Professor
Publisher:
McGraw-Hill Education