14 Aug Capital Planning
I will send the excel spread sheet.. References have to have a web address.
Review the WACC calculations in the attached Excel file. In your own words, do the following:
- Explain the steps for deriving the WACC.
- Discuss the challenges involved in deriving the WACC.
- Rank and discuss other capital project evaluation techniques, and explain the reasoning behind your ranking
| Cost of Capital – WACC | |||||||
| Market Interest Rate | |||||||
| a) What is the market interest rate on UPC's debt and its component cost of debt? | |||||||
| Coupon rate | 6% | ||||||
| Coupons per year | 1 | ||||||
| Years to Maturity | 15 | ||||||
| Price | $10,153.72 | ||||||
| Face value | $10,000 | ||||||
| Tax rate | 30% | ||||||
| N | 15 | ||||||
| PV | $10,153.72 | ||||||
| PMT | $600 | ||||||
| FV | $10,000 | ||||||
| B-T rd | 5.8% | Market Interest Rate | |||||
| A-T rd | 4.1% | Cost of Debt | |||||
| Cost of Preferred Stock | |||||||
| b) What is UPC's cost of preferred stock? | |||||||
| Nominal dividend rate | 8% | ||||||
| Dividends per year | 4 | ||||||
| Par value | $100 | ||||||
| Price | $111.10 | ||||||
| rp | 7.20% | Cost of Preferred Stock | |||||
| Cost of Common Stock | |||||||
| c) What is UPC’s estimated cost of common equity using the CAPM approach? | |||||||
| β | 1.2 | Beta | |||||
| rRF | 7% | Risk Free Rate | |||||
| RPM | 6% | Market Risk Premium | |||||
| rS | 14.20% | Cost of Common Stock | |||||
| Discounted Cash Flow Approach (DCF) | |||||||
| d) What is the estimated cost of common equity using the DCF approach? | |||||||
| Price | $100 | ||||||
| Current dividend | $10.00 | ||||||
| Constant growth rate | 5% | ||||||
| D1 | $10.45 | Dividend after Year 1 | |||||
| rs | 14.95% | Cost of Common Stock | |||||
| Cost of Common Stock | |||||||
| e) What is the bond-yield-plus-risk-premium estimate for UPC’s cost of common equity? | |||||||
| "Bond yield + RP" premium | Given RP = | 3% | |||||
| ks = | 8.84% | ||||||
| PART G | |||||||
| f) What is your final estimate for rs? | |||||||
| METHOD | ESTIMATE | ||||||
| CAPM | 14.20% | ||||||
| DCF | 14.95% | ||||||
| rd + RP | 8.84% | ||||||
| Average | 12.66% | ||||||
| WACC | |||||||
| g) What is UPC’s overall, or weighted average cost of capital (WACC)? | |||||||
| Structure | |||||||
| wd | 30% | A-T rd | 4.09% | ||||
| wp | 10% | rp | 7.20% | WACC = | 9.55% | ||
| ws | 60% | rs | 12.66% | ||||
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