Chapter 11

Topics: Stock, Weighted average cost of capital, Stock market Pages: 2 (255 words) Published: October 31, 2012
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%|
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