Start with the partial model in the file Ch11 P18 Build a Model.xlsx. The stock of Gao Computing sells for $70, and last year's dividend was $4.38. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. A flotation cost of 11% would be required to issue new common stock. Gao's preferred stock sells for $21.74, pays a dividend of $2.20 per share, and new preferred stock could be sold with a flotation cost of 8%. The firm has outstanding bonds with 20 years to maturity, a 9% annual coupon rate, semiannual payments, and $1,000 par value. The bonds are trading at $839.54. The tax rate is 25%. The market risk premium is 6%, the risk-free rate is 6.5%, and Gao's beta is 1.2. In its cost-of-capital calculations, Gao uses a target capital structure with 40% debt, 10% preferred stock, and 50% common equity.The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places. Download spreadsheet Ch11 P18 Build a Model-e3a293.xlsx Calculate the cost of each capital component—in other words, 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 CAPM method and the dividend growth approach to find the cost of equity. After-tax cost of debtfill in the blank 2 %Cost of preferred stock (including flotation costs)fill in the blank 3 %Cost of common equity, dividend growth approachfill in the blank 4 %(ignoring flotation costs)Cost of common equity, CAPMfill in the blank 5 % Calculate the cost of new stock using the dividend growth approach.fill in the blank 6 %Assuming that Gao will not issue new equity and will continue to use the same target capital structure, what is the company's WACC?fill in the blank 7 % WACCCurrent price of common stock, PoLast year's dividend on common stock, DoGrowth rate of common dividend, gFlotation cost for common stockCurrent price of preferred stock, PpsPreferred dividend, DpsFlotation cost for preferred stockBond's years to maturityNumber of coupon payment per yearAnnual coupon ratePar valueBond priceTax rateMarket risk premium, RPMRisk-free rate, "RFBetaWeight of long-term debt, wdWeight of preferred stock, WpsWeight of common stock, wsa. Calculating the cost of each capital componentAnnual before-tax cost of debtAfter-tax cost of debt$70.00$4.387%11%$21.74$2.208%Cost of preferred stock (including flotation costs)Cost of common equity, dividend growth approach (ignoring flotation costs)Cost of common equity, CAPM202$1,000.00$839.54b. Calculating the cost of new stock using the dividend growth approachCost of new stock, dividend growth approach9%25%6.0%6.5%1.240%10%50%Formulas1#N/A#N/A#N/A#N/A#N/A#N/Ac. Calculating the company's WACC if Gao will not issue new equity and will continue to use the same target capital structureWACC#N/A

A company can raise funds from multiple sources. A mix or collection of all funding sources is a…

Answered: Start with the partial model in the…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter2: The Domestic And International Financial Marketplace

Section: Chapter Questions

Problem 1P

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Start with the partial model in the file Ch11 P18 Build a Model.xlsx. The stock of Gao Computing sells for $70, and last year's dividend was $4.38. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. A flotation cost of 11% would be required to issue new common stock. Gao's preferred stock sells for $21.74, pays a dividend of $2.20 per share, and new preferred stock could be sold with a flotation cost of 8%. The firm has outstanding bonds with 20 years to maturity, a 9% annual coupon rate, semiannual payments, and $1,000 par value. The bonds are trading at $839.54. The tax rate is 25%. The market risk premium is 6%, the risk-free rate is 6.5%, and Gao's beta is 1.2. In its cost-of-capital calculations, Gao uses a target capital structure with 40% debt, 10% preferred stock, and 50% common equity.

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places.

Download spreadsheet Ch11 P18 Build a Model-e3a293.xlsx

Calculate the cost of each capital component—in other words, 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 CAPM method and the dividend growth approach to find the cost of equity.

After-tax cost of debt	fill in the blank 2 %
Cost of preferred stock (including flotation costs)	fill in the blank 3 %
Cost of common equity, dividend growth approach	fill in the blank 4 %
(ignoring flotation costs)
Cost of common equity, CAPM	fill in the blank 5 %

Calculate the cost of new stock using the dividend growth approach.

fill in the blank 6 %
Assuming that Gao will not issue new equity and will continue to use the same target capital structure, what is the company's WACC?

fill in the blank 7 %

WACC
Current price of common stock, Po
Last year's dividend on common stock, Do
Growth rate of common dividend, g
Flotation cost for common stock
Current price of preferred stock, Pps
Preferred dividend, Dps
Flotation cost for preferred stock
Bond's years to maturity
Number of coupon payment per year
Annual coupon rate
Par value
Bond price
Tax rate
Market risk premium, RPM
Risk-free rate, "RF
Beta
Weight of long-term debt, wd
Weight of preferred stock, Wps
Weight of common stock, ws
a. Calculating the cost of each capital component
Annual before-tax cost of debt
After-tax cost of debt
$70.00
$4.38
7%
11%
$21.74
$2.20
8%
Cost of preferred stock (including flotation costs)
Cost of common equity, dividend growth approach (ignoring flotation costs)
Cost of common equity, CAPM
20
2
$1,000.00
$839.54
b. Calculating the cost of new stock using the dividend growth approach
Cost of new stock, dividend growth approach
9%
25%
6.0%
6.5%
1.2
40%
10%
50%
Formulas
1#N/A
#N/A
#N/A
#N/A
#N/A
#N/A
c. Calculating the company's WACC if Gao will not issue new equity and will continue to use the same target capital structure
WACC
#N/A

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