CORP FIN 51: Using the Payback Method, IRR, and NPV

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WACC#1

Exercise:		(From the Cost of Capital Workbook Pratt, Shannon 2nd edition)
A1	The required return on debt is 8%, the required return on equity is 14% and the marginal tax rate is 40%.
		If the firm is financed 70% equity and 30% debt , what is the WACC?
	Definitions:	L=Leverage		L=the market value proportion of debt financing
		D= Debt
		T=marginal corporate tax rate of income from the project
		rsub e = required return for equity
		rsub d = required return for debt
	Set up the problem:
		D=	0.3
		E=	0.7
		rsub e =	0.07
		rsub d=	0.09
		T=	0.4
		L=	0.3
	Solution:
		L = D / (D + E) = 30% / (30% + 70%) = 0.30
		WACC = (1 - L)re + L(1 - T)rd			Excel solution:
		WACC = (1 - 0.30) x 14% + 0.30(1 - 0.40) x 8% = 11.24%			WACC=	0.0652

WACC#2

Exercise:		(From the Cost of Capital Workbook Pratt, Shannon 2nd edition)
	The following are known about public Company XYZ
	4,000,000	million shares of common stock issued and outstanding
	$10	Closing common stock price per share
	2,000,000	shares of preferred stock issued and outstanding
	$16	Closing preferred stock price per share
	$10,000,000	Face value of bonds issued and outstanding
	$80	Closing Bond Price (80% of face value)
	25%	Cost of common equity for XYZ
	$2.40	Cumulative, non-participating dividend on preferred stock every year
	10%	Cost of debt before tax effect
	40%	Combined federal/state income tax rate
		Preferred Equity Cost?
15%		Because the market price is $16.00 and its dividend per share is $2.40 the
		cost is:	$2.40/$16.00 = 0.15 or 15%
		Excel solution:		0.15
		The after -tax cost of debt for Company XYZ is:
6%		In the return to debt component, interest is a tax-deductable expense
		to a corporate taxpayer. One way to approximate the cost of debt after
		taxes or net of the tax effect is to multiply the cost of debt
		before tax by (1-tax rate): 10% x (1-0.40) = 0.10 x 0.60 = 6%
		Excel solution:		0.06
		Compute the market value of invested capital (MVIC) and the weights
		for each capital structure component of XYZ.
Component		Amount	Price	Component Total	Weight
Common Stock		4000000	$10	$40,000,000	50%
Preferred Stock		2000000	$16	$32,000,000	40%
Debt		$10,000,000	0.8	$8,000,000	10%
MVIC				$80,000,000	100%
What is the WACC?
WACC=		=(25% x 0.50) + (15% x 0.40) + [10%(1-0.40) x 0.10]
		=12.5% + 6% + 0.6%
		=19.10%
Or in tab form:
						Put our scenario here (calculate the Common Stock cost using the DCF calculation):
Component		Cost		Weight	Weighted Cost	Component	Cost	Weight	Weighted Cost
Common Stock		25%		0.5	12.50%	Common Stock	1%	0.4	0.40%
Preferred Stock		15%		0.4	6.00%	Preferred Stock	0%	0	0.00%
Debt		6%		0.1	0.60%	Debt	1%	0.6	0.60%
				WACC	19.10%			WACC	1.00%

WACC#3

Exercise:	(From the Cost of Capital Workbook Pratt, Shannon 2nd edition)
Given the following:
Pretax cost of debt			10%		Ignore cells in Pink
Cost of preferred stock			9%
Cost of common equity			20%		Use this sheet for problem 13.11
Shares of common stock			1,000,000
Price per share of common stock			$7.00		Input the data from problem 13.11 in green cells.
Shares of preferred stock			500,000
Price per share of preferred stock			$4.50		Put the tax rate for problem 13.11 in the orange cells
Face value of debt (same as market value)			$3,000,000
tax rate			30%		Change the formula in cell C25 to match our tax rate.
Compute the WACC…					The answer should then be automatically calculated.
Component	Amount	Price	Component Total		Weight
Common Stock	1,000,000	$7	$7,000,000		57.1%
Preferred Stock	500,000	$5	$2,250,000		18.4%
Debt			$3,000,000		24.5%
Total:			$12,250,000		100%
Component	Cost		Weight		Weighted Cost
Common Stock	0.20	x	57.1%	=	0.1142857143
Preferred stock	0.09	x	18.4%	=	0.0165306122
Debt 0.10 x (1-0.30)=	0.07	x	24.5%	=	0.0171428571
			100.0%		0.1479591837	=	14.80%
	WACC = 14.80%
You could also use the formula from the textbook and not use this excel spreadsheet.

DCF

Discounted Cash Flow Model for Cost of Capital Data
			Put the Guillermo Scenario Information here:
Given the following assumptions on ABC Company:
Dividend latest 12 months	$1.00 per year	$1	Dividend latest 12 months	$0	1
Analysts' growth Est.	5 percent	5%	Analysts' growth Est.	1%	1%
Stock Price:	$10.00 per share	$10	Stock Price:	$1	1
Estimate ABC's Cost of Equity Capital using the single-stage DCF model			Estimate Guillermo's Cost of Equity Capital
			using the single-stage DCF model
k = (NCF0(1 + g)/PV) + 0.05
k=($1.0(1.0.05))/$10 + 0.05
k = ($1.05/$10.00) + 0.05
k = 0.105 + 0.05
k = 0.155 or 15.5%
Excel solution	0.155	or 15%	Excel solution	1.02