Ch09 p18 build a model

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Unformatted text preview: 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. ...
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