Sie sind auf Seite 1von 3

2/1/2012

Chapter 10. Student Ch10 P18 Build a Model

INPUTS USED IN THE MODEL

P0 $50.00
Net Ppf $30.00
Dpf $3.30
D0 $2.10
g 7%
B-T rd 10%
Skye's beta 0.83
Market risk premium, RPM 6.0%
Risk free rate, rRF 6.5%
Target capital structure from debt 45%
Target capital structure from preferred stoc 5%
Target capital structure from common stoc 50%
Tax rate 35%
Flotation cost for common 10%

a. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock
(including flotation costs), and the cost of equity (ignoring flotation costs). Use both the DCF method and the
CAPM method to find the cost of equity.

Cost of debt:

B-T rd × (1 – T) = A-T rd

Cost of preferred stock (including flotation costs):

Dpf / Net Ppf = rpf

Cost of common equity, DCF (ignoring flotation costs):

D1 / P0 + g = rs

Cost of common equity, CAPM:

rRF +
b × RPM = rs

IMPORTANT NOTE: HERE THE CAPM AND THE DCF METHODS PRODUCE APPROXIMATELY THE SAME
COST OF EQUITY. THAT OCCURRED BECAUSE WE USED A BETA IN THE PROBLEM THAT FORCED THE
SAME RESULT. ORDINARILY, THE TWO METHODS WILL PRODUCE SOMEWHAT DIFFERENT RESULTS.
IMPORTANT NOTE: HERE THE CAPM AND THE DCF METHODS PRODUCE APPROXIMATELY THE SAME
COST OF EQUITY. THAT OCCURRED BECAUSE WE USED A BETA IN THE PROBLEM THAT 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

c. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and rs as
determined by the DCF method and add that differential to the CAPM value for rs.)

rs + Differential = re

Again, we would not normally find that the CAPM and DCF methods yield identical results.

d. Assuming that Gao will not issue new equity and will continue to use the same capital structure, what is
the company's WACC?

wd 45.0%
wpf 5.0%
ws 50.0%
100.0%

wd × A-T rd + wpf × rpf + ws × rs = 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. The cost of the common equity for each project should be based on the beta estimate
the project. All equity will come from reinvested earnings.

(2) Equity invested in Project A would have a beta of 0.5. The project has an expected return of 9.0%.

(3) Equity invested in Project B would have a beta of 1.0. The project has an expected return of 10.0%.

(4) Equity invested in Project C would have a beta of 2.0. The project has an expected return of 11.0%.

Analyze the company’s situation and explain why each project should be accepted or rejected.

Expected
return on
Beta rs rps rd(1 – T) WACC project
Project A 0.5
Project B 1.0
Project C 2.0

The expected returns on Projects A and B both exceed their risk-adjusted WACCs, so they should be accepted.
However, Project C's WACC exceeds its expected rate of return, so it should be rejected.

Das könnte Ihnen auch gefallen