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# Weekly tasks or assignments (Individual or Group Projects) will be due by Monday, and late

submissions will be assigned a late penalty in accordance with the late penalty policy found in
the syllabus. NOTE: All submission posting times are based on midnight Central Time.
Key Assignment Draft
Your next assignment as a financial management intern is to apply the knowledge that you
acquired while engaging in the cost of capital discussion that you had with your colleagues. In
this task, you will be calculating the weighted cost of capital for a firm using the book value of
the components and the concepts presented in this phase.
Using the most current annual financial statements from the company you analyzed in Phase 1,
determine the percentage of the firm's assets that are currently be financed with debt (total
liabilities), preferred stock, and common stock (common equity). It is very possible that your
firm will have very little or no preferred stock, so in this class, the percent would be "zero."
Your ratios should add up to 100%. You will also need to calculate the firms average tax rate
using the income tax expense divided by the firm's income before taxes. Use the following
tables:
in thousands
Company Total Assets
Total
Liabilities
Total Preferred
Stock
Total Common
Equity
Dollar Value 36,626,300 20,616,600 0 16,009,700
% of Assets 100 56 0 44
Company Income before Tax
Income Tax
Expense
Average Tax Rate
(%)
Mc Donald 8,204,500 2,618,600 32
The first component to determine is the cost of debt. You mentor suggests using the Web site
that you used in the previous Phase to find the pretax yield-to-maturity of a bond with at least 5
years left before maturity. Using the following table, calculate the firm's after-tax cost of debt:
Yield to Maturity 1 - Average Tax Rate After-tax Cost of Debt
6.45 0.68 4.386
Now you will need to calculate the cost of preferred stock. You can use the following table:
Annual Dividend Current Value of Preferred Stock
Cost of Preferred
Stock (%)
0 0 0
To calculate the cost of common equity, you can use the CAPM model. Using current stock
data, the yield on the 5-year Treasury bond, and the return on the market calculated in Phase 2,
you can calculate the cost of common equity using the following table:
5-year Treasury Bond Yield
(risk-free rate)
Stock's
Beta
Return on the Top 500
Stocks (market return)
Cost of
Common
Equity
1.74 0.34 19.6 7.81
Now, you can use the cost and ratios from above to calculate the firm's weighted average cost
of capital (WACC) using the following table:

After-Tax Cost
of Debt
Cost of
Preferred
Stock
Cost of
Common
Equity
WACC
Unweighted Cost 4.386 0 7.81 12.196
Weight of Component 0.56 0 0.44

Weighted Cost of
Component
2.456 0 3.436 5.893
After completing the required calculations, explain your results in a Word document, and attach
o How would you expect the weighted average cost of capital (WACC) to differ if you had used
market values of equity rather than the book value of equity, and why?
o What would you expect would happen to the cost of equity if you had to raise it by selling new
equity, and why?
o If the after-tax cost of debt is always less expensive than equity, why don't firms use more debt
and less equity?
o What are some of the advantages and disadvantages of raising capital by using debt?
o How would "floatation costs" impacted the WACC, and how could they have been incorporated
in the formula?
Note:You can find information about the top 500 stocks atthis Web site.
Reference
S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site:
http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;i
ndicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;
Be sure to document your paper with in-text citations, credible sources, and list of references
used in proper APA format.