MBA 520 Module Eight Cost of Capital Worksheet
The assignment in this module builds on the idea of forecasting and valuation theory from Chapters 6
and 7 in Module Six by valuing a company through calculations using real data. This will strengthen your
recommendation in the final project by giving you the means to provide evidence from a financial
analysis. This assignment is worth a total of 100 points. See the points distribution listed with each
question.
Prompt
Review the questions below and use the data provided in the question to solve the calculation. As you
work through each equation, think about where the data for your company may be found to make the
same calculations and how the information from these calculation can inform your recommendations for
your final project. Use the non-graded discussion board in this module to ask questions of your peers to
inform your responses to the questions below. This assignment must be submitted as an Excel file.
1. (12.5 Points) What is the market interest rate on XYZ’s debt and its component cost of debt?
Coupon rate
12%
Coupons per year
2
Years to maturity
15 Market Interest Rate =
Cost of Debt =
Price
$1,153.72
Face value
$1,000
Tax rate
40% 2. (12.5 Points) What is the firm’s cost of preferred stock?
Nominal dividend rate
10%
Dividends per year
4
Par value
$100
Price
$111.10
Cost of Preferred Stock =
3. (12.5 Points) What is XYZ’s estimated cost of common equity using the CAPM approach?
β
1.2
rRF
7%
RPM
6%
Estimated Cost of Common Equity = 4. (12.5 Points) What is the estimated cost of common equity using the DCF approach?
Price
$50
Current dividend
$4.19
Constant growth rate
5%
Worksheet adapted from Brigham, E., & Houston, J. F. (2016). Fundamentals of financial management (14th ed.).
Boston, MA: Cengage Learning. Estimated Cost of Common Equity =
5. (12.5 Points) What is the bond-yield-plus-risk-premium estimate for XYZ’s cost of common equity?
"Bond yield + RP" premium
4%
market interest rate on XYZ’s debt
10%
Bond-yield-plus-risk-premium estimate =
6. (12.5 Points) What is your final estimate for rs?
METHOD
ESTIMATE
CAPM
14.20%
DCF
13.80%
rd + RP
14.00%
Estimate =
7. (12.5 points) XYZ estimates that if it issues new common stock, the flotation cost will be 15%. XYZ
incorporates the flotation costs into the DCF approach. What is the estimated cost of newly issued
common stock, considering the flotation cost?
% Flotation cost
15%
Net proceeds after flotation
$42.50
Cost of Newly Issued Common Stock
8. (12.5 Points) What is XYZ’s overall, or weighted average, cost of capital (WACC)? Ignore flotation
costs.
wd
30%
rd (1 – T)
6.00%
wp
10%
rp
9.00%
wc
60%
rs
14.00%

 

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