Capital Planning

helnes

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 r_d	5.8%	Market Interest Rate
A-T r_d	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

r_p	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
r_RF		7%	Risk Free Rate
RP_M		6%	Market Risk Premium

r_S	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
r_s	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%

k_s =	8.84%

PART G
f) What is your final estimate for r_s?

	METHOD	ESTIMATE
	CAPM	14.20%
	DCF	14.95%
	r_d + RP	8.84%
	Average	12.66%


WACC
g) What is UPC’s overall, or weighted average cost of capital (WACC)?
	Structure
w_d	30%	A-T r_d	4.09%
w_p	10%	r_p	7.20%		WACC =	9.55%
w_s	60%	r_s	12.66%