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Student Name:SAPANPANCHAL
INPUTS utilise IN THE MODEL
P0$50.00
Net Ppf$30.00
Dpf$3.30
D0$2.10
g7%
B-T rd10%
Skyes beta0.83
Market risk premium, MRP6.0%
Risk free rate, rRF6.5%
take capital building from debt45%
Target capital expression from preferred express5%
Target capital structure from common monetary fund50%
Tax rate35%
Flotation appeal for common10%
a. visualise the cost of each capital component, i.e., the after-tax cost of debt, the cost of preferred stock (including flotation costs), the cost of equity (ignoring flotation costs) with the DCF method and the CAPM method.
terms of debt
B-T rd x (1-T) =A-T rd
10%65%6.50%
Cost of preferred stock (including flotation costs)
Dpf / Net Ppf =rpf
$3.30$30.0011.00%
Cost of common equity, DCF (ignoring flotation costs)
D1 / P0 + g =rs
$2.25$50.007%11.
49%
Cost of common equity, CAPM
rs =rRF + b * MRP =
6.5%4.98%=11.4800%
IMPORTANT bloodline: HERE THE CAPM AND THE DCF METHODS PRODUCE APPROXIMATELY THE resembling COST OF EQUITY. THAT OCCURRED BECAUSE WE apply A BETA IN THE PROBLEM THAT ESTIMATED FORCED THE SAME RESULT. ORDINARILY, THE TWO METHODS WILL PRODUCE SOMEWHAT DIFFERENT RESULTS.
b. Calculate the cost of new stock using the DCF model.
D0 * (1+g) / P0*(1-F) + g =re
$2.25$45.007%11.99%
c. What is the cost of new common stock, based on the CAPM? (Hint: Find the...If you want to get a full essay, coif it on our website: Orderessay
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