CHAPTER 11: THE COST OF CAPITAL LEARNING GOALS: 1. Understand the key assumptions‚ the basic concept and the specific sources of capital associated with the cost of capital. 2. Determine the cost of long-term debt and the cost of preferred stock. 3. Calculate the cost of common stock equity and convert it into the cost of retained earnings and the cost of new issues of common stock. 4. Calculate the weighted average cost of capital (WACC) and discuss alternative weighing schemes
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Answers to Warm-Up Exercises E9-1. Answer: Weighted average cost of capital N 10‚ PV $20‚000 (1 0.02) $19‚600‚ PMT Solve for I 8.30% 0.08 $20‚000 $1‚600‚ FV $20‚000 E9-2. Cost of preferred stock Answer: The cost of preferred stock is the ratio of the preferred stock dividend to the firm’s net proceeds from the sale of the preferred stock. rp Dp Np rp (0.15 $35) ($35 $3) rp $5.25 $32 16.4% E9-3. Cost of common stock equity Answer: The cost of common stock equity can be found by dividing the dividend
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WEIGHTED AVERAGE COST OF CAPITAL FOR DELL COMPUTER 1) From the SEC website‚ the balance sheet of Dell Computer reveals a Book value of debt = $3‚394‚000‚000 and Book value of equity = $4‚625‚000‚000 The same balance shows the breakdown of the long-term debt (book values) in table 1. Table 1 Coupon Rate (%) Maturity Book Value (Face Value in million $) 3.38 06/15/2012 400 4.70 04/15/2013 599 5.63 04/15/2014 500 5.65 04/15/2018 499 5.88 06/15/2019 600 7.10 04/15/2028 396 6
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ON CHAPTER 15 (COST OF CAPITAL) 1.) The Wind Rider Company has just issued a dividend of $2.10 per share on its common stock. The company is expected to maintain a constant 7% growth rate on its dividends indefinitely. If the stock sells for $40 a share‚ what is the company’s cost of equity? 2.) The Ball Corporation’s common stock has a beta of 1.15. If the risk free rate is 5% and the expected return on the market is 12%‚ what is Ball Corp.’s cost of equity capital? 3.) Stock
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Ameritrade Case Background In his effort to increase returns for Ameritrade shareholders and make Ameritrade the largest brokerage firm worldwide by trading volume‚ Joe Ricketts‚ Chairman and CEO of Ameritrade‚ seeks to improve Ameritrade’s competitive position in the deep-discount brokerage industry by taking advantage of emerging economies of scale. To attract more investors‚ his strategy involves‚ first‚ cutting trade commissions from the existing rate of $29.95 per trade to $8.00. Second
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The electronic private automatic branch exchange (EPABX) is equipment that has made day-to-day working in the offices much simpler‚ especially in the area of communication. The EPABX may be defined as a switching system that makes available both internal and external stitching functions of any organisation. The selection of an EPBAX is a difficult task and requires deep knowledge of traffic pattern of the office. By using an EPABX both the internal and external needs of the organisation are
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MBA 203: Problem Set 4 Cost of Capital at Ameritrade Due: Wednesday‚ November 28‚ 2012‚ by 9:00 a.m. The course material covered in weeks 4 and 5 should be sufficient for doing this problem set. The questions below are for the Cost of Capital at Ameritrade case in your course packet. You can find the data for this case on the course website in a spreadsheet named Ameritrade.xls. Please turn in your problem set solutions by posting them to bSpace as an Excel file or pdf file. Upload a single solution
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International Capital Structure and the Cost of Capital Agenda 1 2 3 4 5 International Capital Structure and the Cost of Capital Analyzing Cost of Capital among Countries Cross Border Listing of Stocks International Asset Pricing Model (IAPM) The Financial Structure of Subsidiaries Case Analysis - AES Corporation 6 International Capital Structure and the Cost of Capital Your Logo International Capital Structure and the Cost of Capital • Firms are becoming multinational in
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Lex Service PLC--- Cost of Capital In 1928 Lex Garages Limited‚ at the time of public incorporation‚ had single garage in London.After 60 years‚ Lex Service PLC became a leading company in automotive distribution and leasing in the United Kingdom. In late 1950‚ Lex obtained from Volvo Car Corporation the exclusive franchise to import and distribute Volvo cars in the United Kingdom that ended in1992 four years before the scheduled termination date. This news dropped the share price of Lexto 30%.
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Marriott cost of capital Objective: 1) Calculate the divisional and the company cost of capital and explain the calculation. 2) Evaluate Marriott’s use of company cost-of-capital rate for the individual divisions. Cost of Capital for Lodging Division can be expressed as CC = We*Ce + Wd*Cd. For the weights of debt and equity (We and Wd)‚ the 1988 target-schedule rates of debt-to-assets and debt-to-equity were used as the only measures available in the case. Cost of Equity
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