Chapter 9 Problem 18 Build a Model help

Chapter 9 Problem 18 Build a Model help - Chapter 09 P18...

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P18 Build a Model Use these numbers \$50.00 \$30.00 \$3.30 \$2.10 g 7% 10% Skye's beta 0.83 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: Cost of preferred stock (including flotation costs): Cost of common equity, DCF (ignoring flotation costs): g = Cost of common equity, CAPM: = = P 0 Net P pf D pf D 0 B-T r d Market risk premium, RP M Risk free rate, r RF a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the DCF method and the CAPM method to find the cost of equity. B-T r d × (1 T) = A-T r d D pf / Net P pf = r pf D 1 / P 0 + r s r RF + b × RP M r s IMPORTANT NOTE : HERE THE CAPM AND THE DCF METHODS PRODUCE APPROXIMATELY THE SAME COST OF EQUITY. THAT OCCURRED BECAUSE WE USED A BETA IN THE PROBLEM THAT FORCED THE

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This note was uploaded on 02/02/2011 for the course FINC 350 taught by Professor Johnson during the Spring '11 term at UCLA.

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Chapter 9 Problem 18 Build a Model help - Chapter 09 P18...

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