Chapter 11
Chapter 11 Mini Case, Q1-4 ONLY, pgs. 353-354 1. Compute the yield to maturity and the after-tax cost of debt for the two bond issues. Bond 1 | | Maturity | 12 | Coupone | 3,5% | Par | 1000 | Flotation | 0 | PV | 1031 | Before tax | 3,19% | After tax cost of Bond | 2,10% |
Bond 2 | | Maturity | 32 | Coupone | 4,0% | Par | 1000 | Flotation | 0 | PV | 1035 | Before tax | 3,8% | After tax cost of Bond | 2,5% |
2. Compute BioCom's cost of preferred stock. Preferred Stock | | Price | 19 | Flotation | | Dividend | 1,5 | Par | 50 | | | Cost of Pref | 7,89% |
3. Compute BioCom's cost of common equity. Use the average of results from the dividend growth model and the security market line. Common stocks | | Dividend | 2,5 | Growth Rate | 6% | Price | 35 | Cost of equity | 13,57% |
Common stocks | | Market return | 12% | Risk Free | 3% | Beta | 1,2 | Cost of equity | 13,80% | Common stocks | | SML | 14% | Dividend Growth Model | 0,135714 | Average cost of equity | 13,69% |
4. Compute BioCom's weighted average cost of capital. Should you use book values or market values for this computation?
For calculating the WACC, I would use Book Values because for calculating on Market Rates we need to know quantity of common and preferred stock shares. Type of Capital | Percent of Book Value | Cost | | Bond 1 | 18% | 2,10% | 0,38% | Bond 2 | 20% | 2,53% | 0,51% | Pref | 20% | 7,89% | 1,58% | Com | 5% | 13,69% | 0,68% | Retained earnings | 37% | | 0,00% | Tot cost | | | 3,15%
Bond 2 | | Maturity | 32 | Coupone | 4,0% | Par | 1000 | Flotation | 0 | PV | 1035 | Before tax | 3,8% | After tax cost of Bond | 2,5% |
2. Compute BioCom's cost of preferred stock. Preferred Stock | | Price | 19 | Flotation | | Dividend | 1,5 | Par | 50 | | | Cost of Pref | 7,89% |
3. Compute BioCom's cost of common equity. Use the average of results from the dividend growth model and the security market line. Common stocks | | Dividend | 2,5 | Growth Rate | 6% | Price | 35 | Cost of equity | 13,57% |
Common stocks | | Market return | 12% | Risk Free | 3% | Beta | 1,2 | Cost of equity | 13,80% | Common stocks | | SML | 14% | Dividend Growth Model | 0,135714 | Average cost of equity | 13,69% |
4. Compute BioCom's weighted average cost of capital. Should you use book values or market values for this computation?
For calculating the WACC, I would use Book Values because for calculating on Market Rates we need to know quantity of common and preferred stock shares. Type of Capital | Percent of Book Value | Cost | | Bond 1 | 18% | 2,10% | 0,38% | Bond 2 | 20% | 2,53% | 0,51% | Pref | 20% | 7,89% | 1,58% | Com | 5% | 13,69% | 0,68% | Retained earnings | 37% | | 0,00% | Tot cost | | | 3,15%