CHAPTER 14
B-261
w
4
= $55,500,000/$187,850,000
w
4
= .2954 or 29.54%
Next, we need to find the YTM for each bond issue. The YTM for each issue is:
P
1
= $1,030 = $35(PVIFA
R%,10
) + $1,000(PVIF
R%,10
)
R
1
= 2.768%
YTM
1
= 3.146% × 2
YTM
1
= 6.29%
P
2
= $1,080 = $42.50(PVIFA
R%,16
) + $1,000(PVIF
R%,16
)
R
2
= 3.584%
YTM
2
= 3.584% × 2
YTM
2
= 7.17%
P
3
= $970 = $41(PVIFA
R%,31
) + $1,000(PVIF
R%,31
)
R
3
= 3.654%
YTM
3
= 4.276% × 2
YTM
3
= 8.54%
P
4
= $1,110 = $49(PVIFA
R%,50
) + $1,000(PVIF
R%,50
)
R
4
= 4.356%
YTM
4
= 4.356% × 2
YTM
4
= 8.71%
The weighted average YTM of the company’s debt is thus:
YTM = .2193(.0629) + .2012 (.0717) + .2840(.0854) + .2954(.0871)
YTM = .0782 or 7.82%
And the aftertax cost of debt is:
R
D
= .0782(1 – .034)
R
D
= .0516 or 5.16%
23.
a.
Using the dividend discount model, the cost of equity is:
R
E
= [(0.80)(1.05)/$61] + .05
R
E
= .0638 or 6.38%
b.
Using the CAPM, the cost of equity is:
R
E
= .055 + 1.50(.1200 – .0550)
R
E
= .1525 or 15.25%
c.
When using the dividend growth model or the CAPM, you must remember that both are estimates
for the cost of equity. Additionally, and perhaps more importantly, each method of
estimating
the cost of equity depends upon different assumptions.