Book: Keown, A., Martin, J., & Petty, J. (2011). Foundations of finance (7th ed.
ID: 2692104 • Letter: B
Question
Book: Keown, A., Martin, J., & Petty, J. (2011). Foundations of finance (7th ed.). Boston, MA: Prentice Hall. ISBN: 9780136113652 Review the financial information in the Chapter 9 Mini Case on pages 260 and 261 of you text. Answer the following questions in an Excel document. Solve using Excel formulas (preferred) or clearly write out the steps you took to calculate your answers. Round any dollar amounts to the nearest dollar ($1,500,074) and any percentages to two decimals (9.56%). Market prices are $1,035 for bonds, $19 for preferred stock, and $35 for common stock. There will be sufficient internal common equity funding (i.e., retained earnings) available such that the firm does not plan to issue new common stock. Calculate the firmExplanation / Answer
Cost of Debt:
$1,035 (1 - .15) = $879.75 = NP0
$879.75 = +
kd = 9.49%
After-tax cost of debt = 9.51% (1 - .34)
= 6.26%
Cost of Preferred Stock
kps = D
NP0
= $1.50
($19 - $2.01)
= 8.83%
Cost of Internal Common Funds:
kcs = + g
= + 0.06
= .1357 = 13.57%
Weighted Cost of Capital (K wacc) using internal common funds only:
Weights
Costs
Weighted Costs
Bonds
0.38
6.26%
0.0238
Preferred Stock
0.15
8.83%
0.0132
New Common Stock
0.47
13.57%
0.0638
1.00
.1008 or 10.08%
b. Raising external common equity
Cost of External Common Stock:
K ncs = + g
= + 0.06
= .1414 = 14.14%
Weighted Cost of Capital (K wacc) using external common funds only:
Weights
Costs
Weighted Costs
Bonds
0.38
6.26%
0.0238
Preferred Stock
0.15
8.83%
0.0132
New Common Stock
0.47
14.14%
0.0665
1.00
.1035 or 10.35%
Weights
Costs
Weighted Costs
Bonds
0.38
6.26%
0.0238
Preferred Stock
0.15
8.83%
0.0132
New Common Stock
0.47
13.57%
0.0638
1.00
.1008 or 10.08%