Sep 26, 2017 term paper 2

# CALCULATE THE COST OF EACH CAPITAL COMPONENT, AFTER-TAX COST OF DEBT, COST OF PREFERRED, AND COST

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1. Calculate the cost of each capital component, after-tax cost of debt, cost of preferred, and cost of equity with the DCF method and CAPM method.

2. What do you estimate the company’s WACC?

Please use data from the provided worksheet. Let me know if you find anything wrong with the data if it interferes with solving the above problems. Please add a new worksheet to the workbook attached. Thank you!!

**TIPS**

1) cost of debt
You should look for publicly traded bonds for the firm and the Yield to Maturity (YTM) for the longest term bond would be an appropriate rate. You may use www.finra.org or morningstar (bonds tab) to obtain information on publicly traded bonds. If your firm has no debt, you could leave this calculation out.
2) cost of equity
Using CAPM – requires a beta estimation (look for published betas on various websites like MSN money, Reuters) and published risk free rates (10 year US T-bonds) and published market risk premium (historical US market risk premium).
Alternatively, you could calculate the Market risk premium = [Return on Market – Risk free rate]. A proxy for Return on Market is usually a historical (long term, at least 30 years) return on a market index like S&P500. Take a look at the link below for the return on the market (Compound Annual Growth Rate (CAGR) on the S&P 500):
http://www.moneychimp.com/features/market_cagr.htm
(You do not need to calculate the cost of equity calculation using DCF method)
3) cost of preferred stock
If your company does not have preferred stock, leave it out. If it does, then the yield on preferred stock would be your cost of preferred stock.
4) Weights of debt and equity
Use market weights for equity = share price * number of shares outstanding = market capitalization (can be found on yahoo finance or morningstar)
Book weight for debt closely approximates market weight for debt. Ignore all accruals/payables – use only interest bearing debt from the balance sheet when calculating total debt.
Hope this helps. Please discuss in your groups first if you have issues (as your questions are typically company specific), and if have any questions, raise it under this tab.

Please use spreadsheet to post answer. Toolkit available for use provided.

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