Build a Model Solution 11/26/2018
Chapter: 9
Problem: 18
INPUTS USED IN THE MODEL
P0$50.00
D0$3.13
g
7%
10%
Ppf $32.61
Dpf $3.30
8%
12%
Par
$1,000.00
Bond price
$1,171.59
Tax rate
25%
Beta
1.2
Market risk premium, RPM6.0%
Risk free rate, rRF 6.5%
45%
5%
50%
Cost of debt:
N = 40
PMT = $60.00
PV = -$1,171.59
FV = $1,000.00
Cost of preferred stock (including flotation costs):
Cost of common equity, dividend growth approach (ignoring flotation costs):
a. Calculate the cost of each capital component, that is, 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 the CAPM method and the dividend growth
approach to find the cost of equity.
Cost of common equity, CAPM:
rRF + b × RPM =rs
6.5% 7.20% =13.700%
wd45.0%
wpf 5.0%
ws50.0%
c. Assuming that Gao will not issue new equity and will continue to use the same capital structure, what is the company’s
WACC?
b. Calculate the cost of new stock using the dividend growth approach (include flotation costs).