Chapter 10 _ Excel Toolkit - A 1 2 3 4 5 6 7 8 9 10 11 12...

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3/19/20 9 Chapter 10. To l Kit for The Cost of Capital To estimate NCC's cost of debt, use the RATE function to find the yield on the bonds: Number of years to maturity 2 Number of payments per year 2 An ual coupon rate 9% Face value $1,0 0 N = 4 PV = ($835.42) PMT = $45 FV = $1,0 0 5.50 % 1 .0 0% Find the after-tax cost of debt for NCC's bonds is NCC is subject to a 40% marginal tax rate. 1 % Tax rate 40% (1-Tax rate) x 60% x 1 % 6.6% Flotation Costs and the Cost of Debt Number of years to maturity = 30 Tax rate = 40% Flotation percentage cost (F) = 1% Par value = $1,0 0 Maturity payment = $1,0 0 An ual coupon payment = 1 % Number of payments per year = 2 First, calculate the after-tax coupon payments and the net proce ds after the flotation costs. After-tax coupon payment = (Coupon pmt.) (1-Tax rate) After-tax coupon payment = $5 60% After-tax coupon payment = $3 .0 Net proce ds after flotation costs = (Par value) (1-F) Net proce ds after flotation costs = $1,0 0 9 % Net proce ds after flotation costs = $9 0 Number of coupon payments = N = 60 After-tax coupon payment = PMT= 3 .0 Net proce ds after flotation costs = PV= 9 0.0 Payment of face value at maturity= FV= 10 0.0 Periodic after-tax cost of debt = Rate = 3.34% Nominal an ual after-tax cost of debt = 6.68% Pref. Dividend $10.0 Par value $10 .0 Flotation % 2.5% Net prefer ed is ue price $97.50 Pref. Dividend ÷ Net Pref. Price $10.0 ÷ $97.50 10.3% The Risk-Fre Rate The risk-fre rate is often proxied by the yield on a long-term Treasury bond. 4.42% The Market Risk Premium The market risk premium can be estimated by using the historical risk premium or forward-lo king risk premiums. 2.61% Using historical growth rate in dividends as estimate of g: g = 13.20% 16.15% 1 .73% Using expected growth rate in earnings as estimate of g: g = 19.10% 2 .21% 17.79% Estimating Beta Beta can be estimated from historical stock returns. It can also be obtained from many Web sources. ILLUSTRATION OF THE CAPM AP ROACH Risk-fre rate 8% Market risk premium 6% Beta 1.1 + 8.0% + 6.0% 1.1 8.0% + 6.6% 14.6% The simplest DCF model as umes that growth is expected to remain constant, and in this case: 2. Retention Growth Model PROBLEM Find g Payout rate = 52% ROE = 14.50% g = (1-Payout rate) (ROE) g = 48% 14.50% g = 7.0% 3. Analysts' Forecasts PROBLEM Short-term growth = 10.40% Short-term growth period= 5 Long-term growth= 6.50% As umed long-term period= 50 Results Short-term weight = 10% Long-term weight= 90% Ap roximate constant growth rate= 6.9% ILLUSTRATION OF THE DISCOUNTED CASH FLOW AP ROACH Sup ose a firm's stock trades at $32 and its dividend is $2.40. If the expected growth rate is 7%, what is the firm's cost of equity? $32.0
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This note was uploaded on 03/27/2012 for the course FINA 3320 taught by Professor Picou during the Summer '12 term at Texas A&M University, Corpus Christi.

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Chapter 10 _ Excel Toolkit - A 1 2 3 4 5 6 7 8 9 10 11 12...

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