3/22/2008 Chapter 10. Ch10 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 Market risk premium, MRP 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 (1-T) = Cost of preferred stock (including flotation costs) Cost of common equity, DCF (ignoring flotation costs) g = Cost of common equity, CAPM b * MRP = b. Calculate the cost of new stock using the DCF model. g = + Differential Again, we would not normally find the CAPM and DCF methods to 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.
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