Cost of Capital – Project

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Deliverable
length:
Word document of 700–1,000 words with attached Excel Spreadsheet
showing calculations

Weekly tasks or assignments (Individual or Group Projects) will be
due by Monday, and late submissions will be assigned a late penalty in
accordance with the late penalty policy found in the syllabus. NOTE: All
submission posting times are based on midnight Central Time.

Key Assignment Draft

Your next assignment as a financial management intern is to apply
the knowledge that you acquired while engaging in the cost of capital
discussion that you had with your colleagues. In this task, you will be
calculating the weighted cost of capital for a firm using the book value of the
components and the concepts presented in this phase.

Using the most current annual financial statements from the
company you analyzed in Phase 1, determine the percentage of the firm’s assets
that are currently be financed with debt (total liabilities), preferred stock,
and common stock (common equity). It is very possible that your firm will have
very little or no preferred stock, so in this class, the percent would be
“zero.” Your ratios should add up to 100%. You will also need to
calculate the firm’s average tax rate using the income tax expense divided by
the firm’s income before taxes. Use the following tables:

Company

Total Assets

Total Liabilities

Total Preferred Stock

Total Common Equity

Dollar Value

% of Assets

Company

Income before Tax

Income Tax Expense

Average Tax Rate (%)

The first component to determine is the cost of debt. You mentor
suggests using the Web site that you used in the previous Phase to find the
pretax yield-to-maturity of a bond with at least 5 years left before maturity.
Using the following table, calculate the firm’s after-tax cost of debt:

Yield to Maturity

1 – Average Tax Rate

After-tax Cost of Debt

Now you will need to calculate the cost of preferred stock. You
can use the following table:

Annual Dividend

Current Value of
Preferred Stock

Cost of Preferred Stock
(%)

To calculate the cost of common equity, you can use the CAPM
model. Using current stock data, the yield on the 5-year treasury bond, and the
return on the market calculated in Phase 2, you can calculate the cost of
common equity using the following table:

5-year Treasury Bond
Yield
(risk-free rate)

Stock’s Beta

Return on the Top 500
Stocks (market return)

Cost of Common Equity

Now, you can use the cost and ratios from above to calculate the
firm’s weighted average cost of capital (WACC) using the following table:

After-Tax Cost of Debt

Cost of Preferred Stock

Cost of Common Equity

WACC

Unweighted Cost

Weight of Component

Weighted Cost of
Component

  • After completing the required calculations, explain your results
    in a Word document, and attach the spreadsheet showing your work. Be sure to
    explain the following:

    • How would
      you expect the weighted average cost of capital (WACC) to differ if you had
      used market values of equity rather than the book value of equity, and why?

    • What
      would you expect would happen to the cost of equity if you had to raise it by
      selling new equity, and why?

    • If the
      after-tax cost of debt is always less expensive than equity, why don’t firms
      use more debt and less equity?

    • What are
      some of the advantages and disadvantages of raising capital by using debt?

    • How would
      “floatation costs” impacted the WACC, and how could they have been
      incorporated in the formula?

      Note: You can find information about the top 500 stocks at this Web site.

      Reference

      S&P
      500 index chart
      . (2014). Retrieved from the Yahoo! Finance Web site:
      http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

      Be sure to document your paper with in-text citations, credible
      sources, and list of references used in proper APA format.

Objective:

·  Determine the
relationship between risk and return by calculating stock and portfolio
variance.

·  Determine the firm’s
cost of capital.

·  Use effective
communication, team and problem-solving skills to collaborate on a project.

P4IP – studypool.docx

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