4/16/2010 Chapter 09. Ch09 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 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: = = b. Calculate the cost of new stock using the DCF model. g = + Differential = + = Again, we would not normally find that the CAPM and DCF methods yield identical results. 45.0% 5.0% 50.0% 100.0% = WACC = e. Suppose Gao is evaluating three projects with the following characteristics: (1) Each project has a cost of $1 million. They will all be financed using the target mix of long-term debt, preferred stock, and common equity. The cost of the common equity for each project should be based on the beta estimated fo the project. All equity will come from reinvested earnings.
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