| 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% |
helnes
_db3_caap_plan.xlsx
