Cost of Capital

COST OF CAPITAL
Cost of Debt
1. Samgy Corp has a P1,000 par value bond outstanding with 25 years to maturity.
The bond carries an annual interest payment of P88 and is currently selling for
P925. Samgy Corp is in a 30% tax bracket. The firm wishes to know what the
after-tax cost of a new bond issue is likely to be. The yield to maturity on the new
issue will be the same as the yield to maturity on the old issue because the risk
and maturity date will be similar.
a. Compute the approximate yield to maturity on the old issue and use this as the
yield for the new issue
b. Make the appropriate tax adjustment to determine the after-tax cost of debt
2. Shabu-shabu Corp has a P5,000 par value bond outstanding with 9 years to
maturity. The bond carries an annual interest payment of P500 and is currently
selling for P4,908. Samgy Corp is in a 25% tax bracket. The firm wishes to know
what the after-tax cost of a new bond issue is likely to be. The yield to maturity
on the new issue will be the same as the yield to maturity on the old issue because
the risk and maturity date will be similar.
a. Compute the approximate yield to maturity on the old issue and use this as the
yield for the new issue
b. Make the appropriate tax adjustment to determine the after-tax cost of debt
Cost of Preferred Shares
3. Poland Inc. has just issued preferred stock. The stock has 10% annual dividend
and a P100 par value and was sold at P95 per share. In addition, flotation costs
of P2.50 per share must be paid. Calculate the cost of preferred stock.
4. China Inc. has just issued preferred stock. The stock has 7.5% annual dividend
and a P600 par value and was sold at P650 per share. In addition, 10% flotation
costs per share must be paid. Calculate the cost of preferred stock.
Cost of Common Shares
a. Dividend Growth Model (Gordon Model)
Constant Growth
5. PBP Business Outsourcing’s shareholders require a minimum return of 18%.

The company paid out a dividend of P6.00 per share, which expected to increase
by 10% per annum. What is the value of a share using the Dividend Growth Model?
6. Partacalao Capital Venture’s share are currently trading at P75 per share. The
Company las paid out a dividend of P6.00 per share, which is expected to increase
by 10% per annum.
Non-Constant Growth
7. JPP Global Business Hub’s ordinary share has just paid a dividend or P6.00 per
share which is expected to grow at 18% in the first 3 years and from the 4th year,
the growth will be 7% per year forever. The share has a required rate of return
of 20%. What is the price investors would be willing to pay for the share?
8. What is the price of a share which last paid a dividend of P10 per share and is
expected to grow at 25% per annum for the next 4 years after which it will have
a constant growth rate of 10% per annum? The investor requires 30% for a share
of the same risk.
a. Capital Asset Pricing Model
9. Using the basic equation for the capital asset pricing model (CAPM), find the
required return for an asset with a beta of 0.80 when the risk-free rate and market
return are 8 and 12% respectively.
10. Using the basic equation for the capital asset pricing model (CAPM), find the
required return for an asset with a beta of 0.85 when the risk-free rate and risk
premium are 8 and 2% respectively.
Weighted Average Cost of Capital
11. JPIA CLSU Corp’s capital structure is as follows:
Debt 35%
Preferred stock 15%
Common Equity 50%
The before-tax cost of debt is 6.5%; the cost of preferred stock is 10%; and the
cost of common equity (in the form of retained earnings) is 13.50% The tax rate
is 25%.
Requirement: Calculate JPIA CLSU’s weighted cost of capital (WACC).
11. JPIA CLSU Corp’s capital structure is as follows:
Debt 35%
Preferred stock 15%
Common Equity 50%
The after-tax cost of debt is 65%; the cost of preferred stock is 10%; and the cost
of common equity (in the form of retained earnings) is 13.50%. The tax rate is
25%.
Requirement: Calculate JPIA CLSU’s weighted cost of capital (WACC).

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Cost of Preferred Shares

Cost of Common Shares

a. Dividend Growth Model (Gordon Model)

5. PBP Business Outsourcing’s shareholders require a minimum return of 18%.

a. Capital Asset Pricing Model

Weighted Average Cost of Capital

11. JPIA CLSU Corp’s capital structure is as follows:

Requirement: Calculate JPIA CLSU’s weighted cost of capital (WACC).

11. JPIA CLSU Corp’s capital structure is as follows:

Requirement: Calculate JPIA CLSU’s weighted cost of capital (WACC).

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