The after tax cost of debt, the cost of preferred stock , the cost of equity from retained earnings , and the cost of newly issued common stock. Weighted Average Cost of Capital (WACC): The Weighted Average Cost of Capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm. It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.

Question

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Answer 1

Question

Chapter 10, Problem 21SP

a.

Summary Introduction

To determine: The after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock.

Weighted Average Cost of Capital (WACC):

The Weighted Average Cost of Capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm.

It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.

a.

Expert Solution

Explanation of Solution

Calculate the cost of debt.

Cost of debt=Cost of debt before tax×(1−Tax rate)=10%×(1−0.35)=10%×0.65= 6.5%

Therefore, the cost of debt is 6.5%.

Calculate the cost of preferred stock.

Cost of preferred stock=Preference dividendPrice of preferred stock=3.3030= 11%

Therefore, the cost of preferred stock is 11%.

Calculate the cost of newly issued equity stock.

Cost of issued stock=[Last dividend×(1+Growth rate)Net proceeds]+Growth rate=[2.10×(1.09)(55×0.9)]+0.09=0.1362= 13.62%

Therefore, the cost of newly issued equity stock is 13.62%.

Calculate the cost of equity from retained stock.

Cost of equity from retained stock=[Last dividend×(1+Growth rate)Price of share]+Growth rate=[2.10×1.0955]+0.09 =0.1316= 13.16%

Therefore, the cost of equity from retained stock is 13.16%.

Conclusion

Hence, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock are calculated as above.

b.

Summary Introduction

To determine: The cost of retained earnings using the CAPM method.

b.

Expert Solution

Explanation of Solution

Calculate the cost of retained earnings.

Cost of retained earnings=Risk free rate+Beta×Market risk premium=6%+1.516×5%= 13.53%

Conclusion

Hence, the cost of retained earnings is 13.53%.

c.

Summary Introduction

To determine: The cost of newly issued stock using CAPM method.

c.

Expert Solution

Explanation of Solution

Calculate the cost of newly issued stock.

Cost of newly issued stock=[Cost of retained earnings using CAPM method+(Cost of newly issued equity stock− Cost of equity from retained stocks)]=[13.53 + (13.62−13.16)]=13.99%

Conclusion

Hence, the cost of newly issued stock is 13.99%.

d.

Summary Introduction

To determine: The weightage average cost of capital (WACC) from retained earnings and from newly issued stocks.

d.

Expert Solution

Explanation of Solution

Calculate the WACC if retained earnings are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.16×13004100)=1.9024+0.6707+4.3332+4.1727=11.079 or 11.08%

Therefore, the WACC with retained earnings is 11.08%.

Calculate the WACC if newly issued stocks are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.62×13004100)=1.9024+0.6707+4.3332+4.3185=11.2248 or 11.23%

Therefore, the WACC with newly issued stocks is 11.23%.

Conclusion

Hence, the weightage average cost of capital (WACC) from retained earnings and from newly issued stocks are calculated as above.

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Answer 2

Question

Chapter 10, Problem 21SP

a.

Summary Introduction

To determine: The after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock.

Weighted Average Cost of Capital (WACC):

The Weighted Average Cost of Capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm.

It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.

a.

Expert Solution

Explanation of Solution

Calculate the cost of debt.

Cost of debt=Cost of debt before tax×(1−Tax rate)=10%×(1−0.35)=10%×0.65= 6.5%

Therefore, the cost of debt is 6.5%.

Calculate the cost of preferred stock.

Cost of preferred stock=Preference dividendPrice of preferred stock=3.3030= 11%

Therefore, the cost of preferred stock is 11%.

Calculate the cost of newly issued equity stock.

Cost of issued stock=[Last dividend×(1+Growth rate)Net proceeds]+Growth rate=[2.10×(1.09)(55×0.9)]+0.09=0.1362= 13.62%

Therefore, the cost of newly issued equity stock is 13.62%.

Calculate the cost of equity from retained stock.

Cost of equity from retained stock=[Last dividend×(1+Growth rate)Price of share]+Growth rate=[2.10×1.0955]+0.09 =0.1316= 13.16%

Therefore, the cost of equity from retained stock is 13.16%.

Conclusion

Hence, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock are calculated as above.

b.

Summary Introduction

To determine: The cost of retained earnings using the CAPM method.

b.

Expert Solution

Explanation of Solution

Calculate the cost of retained earnings.

Cost of retained earnings=Risk free rate+Beta×Market risk premium=6%+1.516×5%= 13.53%

Conclusion

Hence, the cost of retained earnings is 13.53%.

c.

Summary Introduction

To determine: The cost of newly issued stock using CAPM method.

c.

Expert Solution

Explanation of Solution

Calculate the cost of newly issued stock.

Cost of newly issued stock=[Cost of retained earnings using CAPM method+(Cost of newly issued equity stock− Cost of equity from retained stocks)]=[13.53 + (13.62−13.16)]=13.99%

Conclusion

Hence, the cost of newly issued stock is 13.99%.

d.

Summary Introduction

To determine: The weightage average cost of capital (WACC) from retained earnings and from newly issued stocks.

d.

Expert Solution

Explanation of Solution

Calculate the WACC if retained earnings are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.16×13004100)=1.9024+0.6707+4.3332+4.1727=11.079 or 11.08%

Therefore, the WACC with retained earnings is 11.08%.

Calculate the WACC if newly issued stocks are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.62×13004100)=1.9024+0.6707+4.3332+4.3185=11.2248 or 11.23%

Therefore, the WACC with newly issued stocks is 11.23%.

Conclusion

Hence, the weightage average cost of capital (WACC) from retained earnings and from newly issued stocks are calculated as above.

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Answer 3

Question

Chapter 10, Problem 21SP

a.

Summary Introduction

To determine: The after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock.

Weighted Average Cost of Capital (WACC):

The Weighted Average Cost of Capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm.

It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.

a.

Expert Solution

Explanation of Solution

Calculate the cost of debt.

Cost of debt=Cost of debt before tax×(1−Tax rate)=10%×(1−0.35)=10%×0.65= 6.5%

Therefore, the cost of debt is 6.5%.

Calculate the cost of preferred stock.

Cost of preferred stock=Preference dividendPrice of preferred stock=3.3030= 11%

Therefore, the cost of preferred stock is 11%.

Calculate the cost of newly issued equity stock.

Cost of issued stock=[Last dividend×(1+Growth rate)Net proceeds]+Growth rate=[2.10×(1.09)(55×0.9)]+0.09=0.1362= 13.62%

Therefore, the cost of newly issued equity stock is 13.62%.

Calculate the cost of equity from retained stock.

Cost of equity from retained stock=[Last dividend×(1+Growth rate)Price of share]+Growth rate=[2.10×1.0955]+0.09 =0.1316= 13.16%

Therefore, the cost of equity from retained stock is 13.16%.

Conclusion

Hence, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock are calculated as above.

b.

Summary Introduction

To determine: The cost of retained earnings using the CAPM method.

b.

Expert Solution

Explanation of Solution

Calculate the cost of retained earnings.

Cost of retained earnings=Risk free rate+Beta×Market risk premium=6%+1.516×5%= 13.53%

Conclusion

Hence, the cost of retained earnings is 13.53%.

c.

Summary Introduction

To determine: The cost of newly issued stock using CAPM method.

c.

Expert Solution

Explanation of Solution

Calculate the cost of newly issued stock.

Cost of newly issued stock=[Cost of retained earnings using CAPM method+(Cost of newly issued equity stock− Cost of equity from retained stocks)]=[13.53 + (13.62−13.16)]=13.99%

Conclusion

Hence, the cost of newly issued stock is 13.99%.

d.

Summary Introduction

To determine: The weightage average cost of capital (WACC) from retained earnings and from newly issued stocks.

d.

Expert Solution

Explanation of Solution

Calculate the WACC if retained earnings are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.16×13004100)=1.9024+0.6707+4.3332+4.1727=11.079 or 11.08%

Therefore, the WACC with retained earnings is 11.08%.

Calculate the WACC if newly issued stocks are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.62×13004100)=1.9024+0.6707+4.3332+4.3185=11.2248 or 11.23%

Therefore, the WACC with newly issued stocks is 11.23%.

Conclusion

Hence, the weightage average cost of capital (WACC) from retained earnings and from newly issued stocks are calculated as above.

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Answer 4

Question

Chapter 10, Problem 21SP

a.

Summary Introduction

To determine: The after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock.

Weighted Average Cost of Capital (WACC):

The Weighted Average Cost of Capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm.

It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.

a.

Expert Solution

Explanation of Solution

Calculate the cost of debt.

Cost of debt=Cost of debt before tax×(1−Tax rate)=10%×(1−0.35)=10%×0.65= 6.5%

Therefore, the cost of debt is 6.5%.

Calculate the cost of preferred stock.

Cost of preferred stock=Preference dividendPrice of preferred stock=3.3030= 11%

Therefore, the cost of preferred stock is 11%.

Calculate the cost of newly issued equity stock.

Cost of issued stock=[Last dividend×(1+Growth rate)Net proceeds]+Growth rate=[2.10×(1.09)(55×0.9)]+0.09=0.1362= 13.62%

Therefore, the cost of newly issued equity stock is 13.62%.

Calculate the cost of equity from retained stock.

Cost of equity from retained stock=[Last dividend×(1+Growth rate)Price of share]+Growth rate=[2.10×1.0955]+0.09 =0.1316= 13.16%

Therefore, the cost of equity from retained stock is 13.16%.

Conclusion

Hence, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock are calculated as above.

b.

Summary Introduction

To determine: The cost of retained earnings using the CAPM method.

b.

Expert Solution

Explanation of Solution

Calculate the cost of retained earnings.

Cost of retained earnings=Risk free rate+Beta×Market risk premium=6%+1.516×5%= 13.53%

Conclusion

Hence, the cost of retained earnings is 13.53%.

c.

Summary Introduction

To determine: The cost of newly issued stock using CAPM method.

c.

Expert Solution

Explanation of Solution

Calculate the cost of newly issued stock.

Cost of newly issued stock=[Cost of retained earnings using CAPM method+(Cost of newly issued equity stock− Cost of equity from retained stocks)]=[13.53 + (13.62−13.16)]=13.99%

Conclusion

Hence, the cost of newly issued stock is 13.99%.

d.

Summary Introduction

To determine: The weightage average cost of capital (WACC) from retained earnings and from newly issued stocks.

d.

Expert Solution

Explanation of Solution

Calculate the WACC if retained earnings are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.16×13004100)=1.9024+0.6707+4.3332+4.1727=11.079 or 11.08%

Therefore, the WACC with retained earnings is 11.08%.

Calculate the WACC if newly issued stocks are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.62×13004100)=1.9024+0.6707+4.3332+4.3185=11.2248 or 11.23%

Therefore, the WACC with newly issued stocks is 11.23%.

Conclusion

Hence, the weightage average cost of capital (WACC) from retained earnings and from newly issued stocks are calculated as above.

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Answer 5

Chapter 10, Problem 21SP

a.

Summary Introduction

To determine: The after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock.

Weighted Average Cost of Capital (WACC):

The Weighted Average Cost of Capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm.

It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.

a.

Expert Solution

Explanation of Solution

Calculate the cost of debt.

Cost of debt=Cost of debt before tax×(1−Tax rate)=10%×(1−0.35)=10%×0.65= 6.5%

Therefore, the cost of debt is 6.5%.

Calculate the cost of preferred stock.

Cost of preferred stock=Preference dividendPrice of preferred stock=3.3030= 11%

Therefore, the cost of preferred stock is 11%.

Calculate the cost of newly issued equity stock.

Cost of issued stock=[Last dividend×(1+Growth rate)Net proceeds]+Growth rate=[2.10×(1.09)(55×0.9)]+0.09=0.1362= 13.62%

Therefore, the cost of newly issued equity stock is 13.62%.

Calculate the cost of equity from retained stock.

Cost of equity from retained stock=[Last dividend×(1+Growth rate)Price of share]+Growth rate=[2.10×1.0955]+0.09 =0.1316= 13.16%

Therefore, the cost of equity from retained stock is 13.16%.

Conclusion

Hence, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock are calculated as above.

b.

Summary Introduction

To determine: The cost of retained earnings using the CAPM method.

b.

Expert Solution

Explanation of Solution

Calculate the cost of retained earnings.

Cost of retained earnings=Risk free rate+Beta×Market risk premium=6%+1.516×5%= 13.53%

Conclusion

Hence, the cost of retained earnings is 13.53%.

c.

Summary Introduction

To determine: The cost of newly issued stock using CAPM method.

c.

Expert Solution

Explanation of Solution

Calculate the cost of newly issued stock.

Cost of newly issued stock=[Cost of retained earnings using CAPM method+(Cost of newly issued equity stock− Cost of equity from retained stocks)]=[13.53 + (13.62−13.16)]=13.99%

Conclusion

Hence, the cost of newly issued stock is 13.99%.

d.

Summary Introduction

To determine: The weightage average cost of capital (WACC) from retained earnings and from newly issued stocks.

d.

Expert Solution

Explanation of Solution

Calculate the WACC if retained earnings are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.16×13004100)=1.9024+0.6707+4.3332+4.1727=11.079 or 11.08%

Therefore, the WACC with retained earnings is 11.08%.

Calculate the WACC if newly issued stocks are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.62×13004100)=1.9024+0.6707+4.3332+4.3185=11.2248 or 11.23%

Therefore, the WACC with newly issued stocks is 11.23%.

Conclusion

Hence, the weightage average cost of capital (WACC) from retained earnings and from newly issued stocks are calculated as above.

Answer 6

Chapter 10, Problem 21SP

a.

Summary Introduction

To determine: The after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock.

Weighted Average Cost of Capital (WACC):

The Weighted Average Cost of Capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm.

It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.

a.

Expert Solution

Explanation of Solution

Calculate the cost of debt.

Cost of debt=Cost of debt before tax×(1−Tax rate)=10%×(1−0.35)=10%×0.65= 6.5%

Therefore, the cost of debt is 6.5%.

Calculate the cost of preferred stock.

Cost of preferred stock=Preference dividendPrice of preferred stock=3.3030= 11%

Therefore, the cost of preferred stock is 11%.

Calculate the cost of newly issued equity stock.

Cost of issued stock=[Last dividend×(1+Growth rate)Net proceeds]+Growth rate=[2.10×(1.09)(55×0.9)]+0.09=0.1362= 13.62%

Therefore, the cost of newly issued equity stock is 13.62%.

Calculate the cost of equity from retained stock.

Cost of equity from retained stock=[Last dividend×(1+Growth rate)Price of share]+Growth rate=[2.10×1.0955]+0.09 =0.1316= 13.16%

Therefore, the cost of equity from retained stock is 13.16%.

Conclusion

Hence, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock are calculated as above.

Answer 7

Chapter 10, Problem 21SP

a.

Summary Introduction

To determine: The after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock.

Weighted Average Cost of Capital (WACC):

The Weighted Average Cost of Capital is the rate that a firm is expected to pay on average to all of its shareholders to finance its assets. WACC is the firm’s cost of capital and is dictated by the external market of the firm.

It represents the minimum return that a firm ought to earn on an existing asset base in order to satisfy its creditors, owners, and other providers of capital, or else they would invested somewhere else.

Answer 8

a.

Expert Solution

Explanation of Solution

Calculate the cost of debt.

Cost of debt=Cost of debt before tax×(1−Tax rate)=10%×(1−0.35)=10%×0.65= 6.5%

Therefore, the cost of debt is 6.5%.

Calculate the cost of preferred stock.

Cost of preferred stock=Preference dividendPrice of preferred stock=3.3030= 11%

Therefore, the cost of preferred stock is 11%.

Calculate the cost of newly issued equity stock.

Cost of issued stock=[Last dividend×(1+Growth rate)Net proceeds]+Growth rate=[2.10×(1.09)(55×0.9)]+0.09=0.1362= 13.62%

Therefore, the cost of newly issued equity stock is 13.62%.

Calculate the cost of equity from retained stock.

Cost of equity from retained stock=[Last dividend×(1+Growth rate)Price of share]+Growth rate=[2.10×1.0955]+0.09 =0.1316= 13.16%

Therefore, the cost of equity from retained stock is 13.16%.

Answer 9

a.

Expert Solution

Answer 10

a.

Expert Solution

Answer 11

Expert Solution

Answer 12

Conclusion

Hence, the after tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock are calculated as above.

Answer 13

b.

Summary Introduction

To determine: The cost of retained earnings using the CAPM method.

b.

Expert Solution

Explanation of Solution

Calculate the cost of retained earnings.

Cost of retained earnings=Risk free rate+Beta×Market risk premium=6%+1.516×5%= 13.53%

Conclusion

Hence, the cost of retained earnings is 13.53%.

Answer 14

b.

Summary Introduction

To determine: The cost of retained earnings using the CAPM method.

Answer 15

b.

Expert Solution

Explanation of Solution

Calculate the cost of retained earnings.

Cost of retained earnings=Risk free rate+Beta×Market risk premium=6%+1.516×5%= 13.53%

Answer 16

b.

Expert Solution

Answer 17

b.

Expert Solution

Answer 18

Expert Solution

Answer 19

Conclusion

Hence, the cost of retained earnings is 13.53%.

Answer 20

c.

Summary Introduction

To determine: The cost of newly issued stock using CAPM method.

c.

Expert Solution

Explanation of Solution

Calculate the cost of newly issued stock.

Cost of newly issued stock=[Cost of retained earnings using CAPM method+(Cost of newly issued equity stock− Cost of equity from retained stocks)]=[13.53 + (13.62−13.16)]=13.99%

Conclusion

Hence, the cost of newly issued stock is 13.99%.

Answer 21

c.

Summary Introduction

To determine: The cost of newly issued stock using CAPM method.

Answer 22

c.

Expert Solution

Explanation of Solution

Calculate the cost of newly issued stock.

Cost of newly issued stock=[Cost of retained earnings using CAPM method+(Cost of newly issued equity stock− Cost of equity from retained stocks)]=[13.53 + (13.62−13.16)]=13.99%

Answer 23

c.

Expert Solution

Answer 24

c.

Expert Solution

Answer 25

Expert Solution

Answer 26

Conclusion

Hence, the cost of newly issued stock is 13.99%.

Answer 27

d.

Summary Introduction

To determine: The weightage average cost of capital (WACC) from retained earnings and from newly issued stocks.

d.

Expert Solution

Explanation of Solution

Calculate the WACC if retained earnings are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.16×13004100)=1.9024+0.6707+4.3332+4.1727=11.079 or 11.08%

Therefore, the WACC with retained earnings is 11.08%.

Calculate the WACC if newly issued stocks are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.62×13004100)=1.9024+0.6707+4.3332+4.3185=11.2248 or 11.23%

Therefore, the WACC with newly issued stocks is 11.23%.

Conclusion

Hence, the weightage average cost of capital (WACC) from retained earnings and from newly issued stocks are calculated as above.

Answer 28

d.

Summary Introduction

To determine: The weightage average cost of capital (WACC) from retained earnings and from newly issued stocks.

Answer 29

d.

Expert Solution

Explanation of Solution

Calculate the WACC if retained earnings are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.16×13004100)=1.9024+0.6707+4.3332+4.1727=11.079 or 11.08%

Therefore, the WACC with retained earnings is 11.08%.

Calculate the WACC if newly issued stocks are used.

WACC=(6.50×12004100)+(11×2504100)+(13.16×13504100)+(13.62×13004100)=1.9024+0.6707+4.3332+4.3185=11.2248 or 11.23%

Therefore, the WACC with newly issued stocks is 11.23%.

Answer 30

d.

Expert Solution

Answer 31

d.

Expert Solution

Answer 32

Expert Solution

Answer 33

Conclusion

Hence, the weightage average cost of capital (WACC) from retained earnings and from newly issued stocks are calculated as above.

Answer 34

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To determine: The cost of retained earnings using the CAPM method.

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To determine: The cost of newly issued stock using CAPM method.

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To determine: The weightage average cost of capital (WACC) from retained earnings and from newly issued stocks.

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Chapter 10 Solutions