Finance Course Project Essay Example
1. Compute the cost of preferred equity assuming the dividend paid for preferred stock is $2.93 and the current value of the stock is $50 per share.
a. What is the cost of preferred equity? (5 pts)
The cost of preferred equity would be 0.0586. To arrive at this answer I simply divided 2.93/50.00.
b. Is there any other method to compute this cost? Explain. (5 pts)
Another method that can be used to compute the cost would be the yield to maturity method. The YTM is the rate required in the market on a bond. This method can be used assuming that payments were made on time.
2. Assuming that the market value weights of these capital sources are 30% bonds, 60% common equity and 10% preferred equity, what is the weighted cost of capital of the firm? (10 pts) Capital Structure | Weight | Cost | Weight*cost | Bond | 30% | 3.63% | 1.089% | Common Equity | 60% | 7.16% | 4.296% | Preferred Stock | 10% | 5.86% | 0.586% | Weight cost of capital | | | 5.971% |
3. Should the firm use this WACC for all projects? Explain and provide examples as appropriate. (10 pts)
Yes, because WACC is by companies for performance evaluation and planning purposes. If the weights were changed then the company would have to make the required changes to yield the proper calculations.
(Weighted Average Cost of Capital (WACC), 2013) 4. Recompute the net present value of the project based on the cost of capital you found. Do you still believe that your earlier recommendation for accepting or rejecting the project was adequate? Why or why not? (5 pts) Year | Cash Flow | Present Factor | Present Value | 1 | $1,100,000 | 0.9437 | $1,038,020 | 2 | $1,450,000 | 0.8905 | 1,291,201 | 3 | 1,300,000 | 0.8403 | 1,092,401 | 4 | 950,000 | 0.7930 | 753,313 | | | Total | 4,174,935 | | | |
a. What is the cost of preferred equity? (5 pts)
The cost of preferred equity would be 0.0586. To arrive at this answer I simply divided 2.93/50.00.
b. Is there any other method to compute this cost? Explain. (5 pts)
Another method that can be used to compute the cost would be the yield to maturity method. The YTM is the rate required in the market on a bond. This method can be used assuming that payments were made on time.
2. Assuming that the market value weights of these capital sources are 30% bonds, 60% common equity and 10% preferred equity, what is the weighted cost of capital of the firm? (10 pts) Capital Structure | Weight | Cost | Weight*cost | Bond | 30% | 3.63% | 1.089% | Common Equity | 60% | 7.16% | 4.296% | Preferred Stock | 10% | 5.86% | 0.586% | Weight cost of capital | | | 5.971% |
3. Should the firm use this WACC for all projects? Explain and provide examples as appropriate. (10 pts)
Yes, because WACC is by companies for performance evaluation and planning purposes. If the weights were changed then the company would have to make the required changes to yield the proper calculations.
(Weighted Average Cost of Capital (WACC), 2013) 4. Recompute the net present value of the project based on the cost of capital you found. Do you still believe that your earlier recommendation for accepting or rejecting the project was adequate? Why or why not? (5 pts) Year | Cash Flow | Present Factor | Present Value | 1 | $1,100,000 | 0.9437 | $1,038,020 | 2 | $1,450,000 | 0.8905 | 1,291,201 | 3 | 1,300,000 | 0.8403 | 1,092,401 | 4 | 950,000 | 0.7930 | 753,313 | | | Total | 4,174,935 | | | |