I will send the excel spread sheet.. References have to have a web address.
Review the WACC calculations in the attached Excel file. In your own words, do the following:
Cost of Capital – WACC | |||||||
Market Interest Rate | |||||||
a) What is the market interest rate on UPC’s debt and its component cost of debt? | |||||||
Coupon rate | 6% | ||||||
Coupons per year | 1 | ||||||
Years to Maturity | 15 | ||||||
Price | $10,153.72 | ||||||
Face value | $10,000 | ||||||
Tax rate | 30% | ||||||
N | 15 | ||||||
PV | $10,153.72 | ||||||
PMT | $600 | ||||||
FV | $10,000 | ||||||
B-T rd | 5.8% | Market Interest Rate | |||||
A-T rd | 4.1% | Cost of Debt | |||||
Cost of Preferred Stock | |||||||
b) What is UPC’s cost of preferred stock? | |||||||
Nominal dividend rate | 8% | ||||||
Dividends per year | 4 | ||||||
Par value | $100 | ||||||
Price | $111.10 | ||||||
rp | 7.20% | Cost of Preferred Stock | |||||
Cost of Common Stock | |||||||
c) What is UPC’s estimated cost of common equity using the CAPM approach? | |||||||
β | 1.2 | Beta | |||||
rRF | 7% | Risk Free Rate | |||||
RPM | 6% | Market Risk Premium | |||||
rS | 14.20% | Cost of Common Stock | |||||
Discounted Cash Flow Approach (DCF) | |||||||
d) What is the estimated cost of common equity using the DCF approach? | |||||||
Price | $100 | ||||||
Current dividend | $10.00 | ||||||
Constant growth rate | 5% | ||||||
D1 | $10.45 | Dividend after Year 1 | |||||
rs | 14.95% | Cost of Common Stock | |||||
Cost of Common Stock | |||||||
e) What is the bond-yield-plus-risk-premium estimate for UPC’s cost of common equity? | |||||||
“Bond yield + RP” premium | Given RP = | 3% | |||||
ks = | 8.84% | ||||||
PART G | |||||||
f) What is your final estimate for rs? | |||||||
METHOD | ESTIMATE | ||||||
CAPM | 14.20% | ||||||
DCF | 14.95% | ||||||
rd + RP | 8.84% | ||||||
Average | 12.66% | ||||||
WACC | |||||||
g) What is UPC’s overall, or weighted average cost of capital (WACC)? | |||||||
Structure | |||||||
wd | 30% | A-T rd | 4.09% | ||||
wp | 10% | rp | 7.20% | WACC = | 9.55% | ||
ws | 60% | rs | 12.66% |
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