Calculating the WACC
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| Calculating the WACC | |||||
| Skye Computer Company: Balance Sheet as of December 31 | |||||
| (in thousands of dollars) | |||||
| 2021 | |||||
| Current assets | $2,000 | ||||
| Net fixed assets | 3,000 | ||||
| Total assets | $0 | ||||
| Accounts payable and accruals | $700 | ||||
| Short-term debt | 200 | ||||
| Long-term debt | 1,850 | ||||
| Preferred stock | 400 | ||||
| Common stock | 900 | ||||
| Retained earnings | 950 | ||||
| Total common equity | $0 | ||||
| Total liabilities and equity | $0 | ||||
| Last year’s earnings per share | $2.60 | ||||
| Current price of common stock, P0 | $50.00 | ||||
| Last year’s dividend on common stock, D0 | $1.70 | ||||
| Growth rate of common dividend, g | 10% | ||||
| Flotation cost for common stock, F | 11% | ||||
| Common stock outstanding | 40,000 | ||||
| Current price of preferred stock, Pp | $30.00 | ||||
| Dividend on preferred stock, Dp | $2.70 | ||||
| Preferred stock outstanding | 15,000 | ||||
| Before-tax cost of debt, rd | 10% | ||||
| Market risk premium, rM – rRF | 5% | ||||
| Risk-free rate, rRF | 6% | ||||
| Beta | 1.384 | ||||
| Tax rate | 25% | ||||
| Total debt | $2,050 | thousand | |||
| a. Calculating the cost of each capital component (using the DCF method to find | |||||
| the cost of common equity) | Formulas | ||||
| After-tax cost of debt | ERROR:#N/A | ||||
| Cost of preferred stock | ERROR:#N/A | ||||
| Cost of retained earnings | ERROR:#N/A | ||||
| Cost of new common stock | ERROR:#N/A | ||||
| b. Calculating the cost of common equity from retained earnings, using the CAPM method | |||||
| Cost of retained earnings | ERROR:#N/A | ||||
| c. Calculating the cost of new common stock based on the CAPM | |||||
| Flotation cost adjustment | ERROR:#N/A | ||||
| Cost of new common stock | ERROR:#N/A | ||||
| d. Calculating 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 | |||||
| Market value (in thousands) | Weight | Market value (in thousands) | Weight | ||
| Total debt | ERROR:#N/A | ERROR:#N/A | |||
| Preferred stock | ERROR:#N/A | ERROR:#N/A | |||
| Сommon equity | ERROR:#N/A | ERROR:#N/A | |||
| Total | ERROR:#N/A | ERROR:#N/A | |||
| WACC1 | ERROR:#N/A | ||||
| WACC2 | ERROR:#N/A |
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