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
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Financial Ratios
A Ratio refers to a figure calculated as a reference to the relationship of two or more numbers and can be expressed as a fraction, proportion, percentage, or the number of times. When the number is determined by taking two accounting numbers derived from the financial statements, it is termed as the accounting ratio.
Return on Equity
The Return on Equity (RoE) is a measure of the profitability of a business concerning the funds by its stockholders/shareholders. ROE is a metric used generally to determine how well the company utilizes its funds provided by the equity shareholders.
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Transcribed Image Text:cel Activity-Calculating the WACC
Download spreadsheet Calculating the WACC-0e1723.xlsx
a. 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.
After-tax cost of debt:
8.25%
Cost of preferred stock:
Cost of retained earnings:
Cost of new common stock:
b. Now calculate the cost of common equity from retained earnings, using the CAPM method..
14.21%
10
11.20
11.78
%
12.11
%
%
Search this cours
%
c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and r, as determined by the DCF method, and addi
that differential to the CAPM value for r.)
14.54%
d. If Skye continues to use the same market-value capital structure, what is the firm's WACC assuming that (1) it uses only retained earnings for equity
and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to
determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.)
WACC₁:
11.02%
WACC₂:
Transcribed Image Text:Current assets
Net fixed assets
Total assets
Accounts payable and accruals
Short-term debt
Long-term debt
Preferred stock (10,000 shares)
Common stock (40,000 shares)
Retained earnings
Total common equity
Total liabilities and equity
2021
$1,400
2,600
$4,000
$ 700
100
700
250
1,100
1,150
$2,250
$4,000
Skye's earnings per share last year were $2.90. The common stock sells for $60.00, last year's dividend (Do) was $2.10, and a flotation cost of 8% would
be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 8%. Skye's preferred stock
pays a dividend of $3.00 per share, and its preferred stock sells for $30.00 per share. The firm's before-tax cost of debt is 11%, and its marginal tax rate is
25%. The firm's currently outstanding 11% annual coupon rate, long-term debt sells at par value. The market risk premium is 5%, the risk-free rate is 6%,
and Skye's beta is 1.642. The firm's total debt, which is the sum of the company's short-term debt and long-term debt, equals $0.8 million.
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.
bant Pallation the WACC-De1723.xlsx
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