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    Managerial Finance CH 10 PDF

    Uploaded by

    Ghina Shaikh
    This document discusses chapters from the textbook "Fundamentals of Financial Management" regarding the cost of capital. It provides formulas for calculating the after-tax cost of debt, cost of preferred stock, weighted average cost of capital (WACC), cost of common equity using different methods, and examples of applying these formulas to evaluate potential projects. The key points covered include how to determine the costs of various sources of financing and use WACC to evaluate whether potential projects should be accepted.

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    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd

    Managerial Finance CH 10 PDF

    Uploaded by

    Ghina Shaikh
    58 views4 pages
    This document discusses chapters from the textbook "Fundamentals of Financial Management" regarding the cost of capital. It provides formulas for calculating the after-tax cost of debt, cost of preferred stock, weighted average cost of capital (WACC), cost of common equity using different methods, and examples of applying these formulas to evaluate potential projects. The key points covered include how to determine the costs of various sources of financing and use WACC to evaluate whether potential projects should be accepted.

    Original Description:

    Managerial Finance - chapter 10 complete solutions

    Original Title

    Managerial Finance CH 10.pdf

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    This document discusses chapters from the textbook "Fundamentals of Financial Management" regarding the cost of capital. It provides formulas for calculating the after-tax cost of debt, cost of preferred stock, weighted average cost of capital (WACC), cost of common equity using different methods, and examples of applying these formulas to evaluate potential projects. The key points covered include how to determine the costs of various sources of financing and use WACC to evaluate whether potential projects should be accepted.

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Download as pdf or txt
    58 views4 pages

    Managerial Finance CH 10 PDF

    Uploaded by

    Ghina Shaikh
    This document discusses chapters from the textbook "Fundamentals of Financial Management" regarding the cost of capital. It provides formulas for calculating the after-tax cost of debt, cost of preferred stock, weighted average cost of capital (WACC), cost of common equity using different methods, and examples of applying these formulas to evaluate potential projects. The key points covered include how to determine the costs of various sources of financing and use WACC to evaluate whether potential projects should be accepted.

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    You are on page 1of 4

    Fundamentals of Financial Management (Brigham Houston- 13th Edition)

    Chapter 10

    The Cost of Capital

    10-1

    After Tax cost of debt = rd  (1 – T)

    = 12%  (1 – 0.35)

    = 7.80%

    m
    er as
    co
    10-2

    eH w
    Cost of preferred stock, rp = Dp / Pp

    o.
    rs e
    ou urc
    = $3.80 / $47.50

    =8%
    o
    aC s

    10-3
    vi y re

    Cost of common stock


    ed d

    WACC = wdrd (1 – T) + wprp + wcrs


    ar stu

    9.96% =0.40 9% (1 – 0.40) + 0 + 0.60 rs


    9.96% = 0.0126 + 0.60 rs
    sh is

    rs = 13%
    Th

    10-4

    a) Retained Earnings, rs = D1 / P0 + g
    =$3.00 / $30 + 0.05
    = 15%

    https://www.coursehero.com/file/27931784/Managerial-Finance-CH-10pdf/
    b) Cost of Equity, re = D1 / P0 – Flotation Cost + g
    = D1 / P0 (1 – F) + g
    = $3 / $30 (1 – 0.10) + 0.05
    =16.11%

    10-6

    a) Cost of Equity, rs = D1 / P0 + g
    =$2.14 / $23 + 0.07
    = 16.30%

    b) Cost of Equity using CAPM, rs = rf + b ( rm – rf )

    m
    er as
    =9% + 1.6% ( 13 – 9)

    co
    = 15.4%

    eH w
    c) rs = Bond Rate + Risk Premium

    o.
    rs e
    ou urc
    = 12% + 4%

    = 16%
    o
    aC s

    10-7 a)
    vi y re

    rs = D1 / P0 + g
    =$3.18 / $36 + 0.06
    ed d
    ar stu

    = 14.83%

    b) % of flotation cost = (36 – 32.40) / 36


    sh is
    Th

    =10%

    c)
    re = D1 / P0 – Flotation Cost + g
    = 3.18 / 32.40 (1 –0.40) + 0.06
    =16.90%

    https://www.coursehero.com/file/27931784/Managerial-Finance-CH-10pdf/
    10-8 rs =$2.00  1.07/ $22.50 + 0.07
    = 16.5%
    WACC = wdrd (1 – T) + wprp + wcrs
    =0.40 12% (1 – 0.40) + 0 + 0.60 16.5
    = 2.88 + 9.9
    = 12.78%
    10-12

    a) Cost of Common Equity,


    rs = D1 / P0 + g
    =$2.00(1.04) / $20 + 0.04

    m
    er as
    = 14.4%

    co
    b)

    eH w
    o.
    WACC = 0.45 10% (1 – 0.40) + 0.55 14.4%
    rs e
    = 2.70 + 7.92
    ou urc
    = 10.62%
    c) If the new project is more risky than the existing business, then finance manager will raise the
    o

    WACC with subjective assumption.


    aC s
    vi y re

    IRR should be more than WACC. So we should accept the Project A.


    ed d
    ar stu

    WACC Project A Project B


    10.62% 13% 10%
    sh is
    Th

    10-18

    a) Cost of Equity,
    rs = D1 / P0 + g
    =$3.50 / $36 + 0.06
    = 15.72%

    https://www.coursehero.com/file/27931784/Managerial-Finance-CH-10pdf/
    b) WACC = wdrd (1 – T) + wprp + wcrs
    =0.15 10% (1 – 0.30) + ($5 / $49)  10% + 0.75 15.72%
    = 1.05 + 1.02 + 11.79
    = 13.86%

    c) If the new project is more risky than the existing business, then finance manager will raise the
    WACC with subjective assumption.

    m
    er as
    WACC Project 1 Project 2 Project 3 Project 4

    co
    10.62% 13% 10%

    eH w
    o.
    rs e
    ou urc
    o
    aC s
    vi y re
    ed d
    ar stu
    sh is
    Th

    https://www.coursehero.com/file/27931784/Managerial-Finance-CH-10pdf/

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