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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
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
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need help with after cost of debt and part c
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: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 %
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
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
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