Solution to FM12 Ch 10 P18 Build a Model

# Solution to FM12 Ch - Chapter 10 Solution for Ch 10 P18 Build a Model INPUTS USED IN THE MODEL P0 Net Ppf Dpf D0 g B-T rd Skye's beta Market risk

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7/11/2006 Chapter 10. Solution for Ch 10 P18 Build a Model INPUTS USED IN THE MODEL \$50.00 \$30.00 \$3.30 \$2.10 g 7% 10% Skye's beta 0.83 Market risk premium, MRP 6.0% 6.5% Target capital structure from debt 45% Target capital structure from preferred stock 5% Target capital structure from common stock 50% Tax rate 35% Flotation cost for common 10% Cost of debt (1-T) = 10% 65% 6.50% Cost of preferred stock (including flotation costs) \$3.30 \$30.00 11.00% Cost of common equity, DCF (ignoring flotation costs) g = \$2.25 \$50.00 7% 11.49% Cost of common equity, CAPM b * MRP = 6.5% 4.98% = 11.48% P 0 Net P pf D pf D 0 B-T r d Risk free rate, r RF a. Calculate the cost of each capital component, i.e., the after-tax cost of debt, the cost of preferred stock (including flotation costs), the cost of equity (ignoring flotation costs) with the DCF method and the CAPM method. B-T r d x A-T r d D pf / Net P pf = r pf D 1 / P 0 + r s r s = r RF + IMPORTANT NOTE : HERE THE CAPM AND THE DCF METHODS PRODUCE APPROXIMATELY THE SAME

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## This note was uploaded on 08/01/2009 for the course FI FI504 taught by Professor J.marsh during the Summer '09 term at DeVry Chicago.

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Solution to FM12 Ch - Chapter 10 Solution for Ch 10 P18 Build a Model INPUTS USED IN THE MODEL P0 Net Ppf Dpf D0 g B-T rd Skye's beta Market risk

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