Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars):   2021 Current assets   $ 1,400   Net fixed assets     2,600   Total assets   $ 4,000     Accounts payable and accruals   $ 900   Short-term debt     100   Long-term debt     625   Preferred stock (15,000 shares)     475   Common stock (40,000 shares)     925   Retained earnings     975     Total common equity   $ 1,900   Total liabilities and equity   $ 4,000     Skye’s earnings per share last year were $4.10. The common stock sells for $50.00, last year’s dividend (D0) was $3.00, and a flotation cost of 12% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 8%. Skye’s preferred stock pays a dividend of $4.20 per share, and its preferred stock sells for $35.00 per share. The firm’s before-tax cost of debt is 9%, and its marginal tax rate is 25%. The firm’s currently outstanding 9% annual coupon rate, long-term debt sells at par value. The market risk premium is 4%, the risk-free rate is 5%, and Skye’s beta is 1.446. The firm’s total debt, which is the sum of the company’s short-term debt and long-term debt, equals $0.725 million. The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. After-tax cost of debt: fill in the blank  % Cost of preferred stock: fill in the blank  % Cost of retained earnings: fill in the blank  % Cost of new common stock: fill in the blank  % Now calculate the cost of common equity from retained earnings, using the CAPM method. fill in the blank  % What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) fill in the blank % If Skye continues to use the same market-value capital structure, what is the firm’s WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.) WACC1: fill in the blank % WACC2: fill in the blank %


Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars):

  2021
Current assets   $ 1,400  
Net fixed assets     2,600  
Total assets   $ 4,000  
 
Accounts payable and accruals   $ 900  
Short-term debt     100  
Long-term debt     625  
Preferred stock (15,000 shares)     475  
Common stock (40,000 shares)     925  
Retained earnings     975  
  Total common equity   $ 1,900  
Total liabilities and equity   $ 4,000  

 

Skye’s earnings per share last year were $4.10. The common stock sells for $50.00, last year’s dividend (D0) was $3.00, and a flotation cost of 12% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 8%. Skye’s preferred stock pays a dividend of $4.20 per share, and its preferred stock sells for $35.00 per share. The firm’s before-tax cost of debt is 9%, and its marginal tax rate is 25%. The firm’s currently outstanding 9% annual coupon rate, long-term debt sells at par value. The market risk premium is 4%, the risk-free rate is 5%, and Skye’s beta is 1.446. The firm’s total debt, which is the sum of the company’s short-term debt and long-term debt, equals $0.725 million.

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places.

  1. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.

    After-tax cost of debt: fill in the blank  %

    Cost of preferred stock: fill in the blank  %

    Cost of retained earnings: fill in the blank  %

    Cost of new common stock: fill in the blank  %

  2. Now calculate the cost of common equity from retained earnings, using the CAPM method.

    fill in the blank  %

  3. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and rs as determined by the DCF method, and add that differential to the CAPM value for rs.)

    fill in the blank %

  4. If Skye continues to use the same market-value capital structure, what is the firm’s WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.)

    WACC1: fill in the blank %

    WACC2: fill in the blank %

 

Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars):   2021 Current assets   $ 1,400   Net fixed assets     2,600   Total assets   $ 4,000     Accounts payable and accruals   $ 900   Short-term debt     100   Long-term debt     625   Preferred stock (15,000 shares)     475   Common stock (40,000 shares)     925   Retained earnings     975     Total common equity   $ 1,900   Total liabilities and equity   $ 4,000     Skye’s earnings per share last year were $4.10. The common stock sells for $50.00, last year’s dividend (D0) was $3.00, and a flotation cost of 12% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 8%. Skye’s preferred stock pays a dividend of $4.20 per share, and its preferred stock sells for $35.00 per share. The firm’s before-tax cost of debt is 9%, and its marginal tax rate is 25%. The firm’s currently outstanding 9% annual coupon rate, long-term debt sells at par value. The market risk premium is 4%, the risk-free rate is 5%, and Skye’s beta is 1.446. The firm’s total debt, which is the sum of the company’s short-term debt and long-term debt, equals $0.725 million. The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity. After-tax cost of debt: fill in the blank  % Cost of preferred stock: fill in the blank  % Cost of retained earnings: fill in the blank  % Cost of new common stock: fill in the blank  % Now calculate the cost of common equity from retained earnings, using the CAPM method. fill in the blank  % What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and rs as determined by the DCF method, and add that differential to the CAPM value for rs.) fill in the blank % If Skye continues to use the same market-value capital structure, what is the firm’s WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.) WACC1: fill in the blank % WACC2: fill in the blank %


Here is the condensed 2021 balance sheet for Skye Computer Company (in thousands of dollars):

  2021
Current assets   $ 1,400  
Net fixed assets     2,600  
Total assets   $ 4,000  
 
Accounts payable and accruals   $ 900  
Short-term debt     100  
Long-term debt     625  
Preferred stock (15,000 shares)     475  
Common stock (40,000 shares)     925  
Retained earnings     975  
  Total common equity   $ 1,900  
Total liabilities and equity   $ 4,000  

 

Skye’s earnings per share last year were $4.10. The common stock sells for $50.00, last year’s dividend (D0) was $3.00, and a flotation cost of 12% would be required to sell new common stock. Security analysts are projecting that the common dividend will grow at an annual rate of 8%. Skye’s preferred stock pays a dividend of $4.20 per share, and its preferred stock sells for $35.00 per share. The firm’s before-tax cost of debt is 9%, and its marginal tax rate is 25%. The firm’s currently outstanding 9% annual coupon rate, long-term debt sells at par value. The market risk premium is 4%, the risk-free rate is 5%, and Skye’s beta is 1.446. The firm’s total debt, which is the sum of the company’s short-term debt and long-term debt, equals $0.725 million.

The data has been collected in the Microsoft Excel file below. Download the spreadsheet and perform the required analysis to answer the questions below. Do not round intermediate calculations. Round your answers to two decimal places.

  1. Calculate the cost of each capital component, that is, the after-tax cost of debt, the cost of preferred stock, the cost of equity from retained earnings, and the cost of newly issued common stock. Use the DCF method to find the cost of common equity.

    After-tax cost of debt: fill in the blank  %

    Cost of preferred stock: fill in the blank  %

    Cost of retained earnings: fill in the blank  %

    Cost of new common stock: fill in the blank  %

  2. Now calculate the cost of common equity from retained earnings, using the CAPM method.

    fill in the blank  %

  3. What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and rs as determined by the DCF method, and add that differential to the CAPM value for rs.)

    fill in the blank %

  4. If Skye continues to use the same market-value capital structure, what is the firm’s WACC assuming that (1) it uses only retained earnings for equity and (2) if it expands so rapidly that it must issue new common stock? (Hint: Use the market value capital structure excluding current liabilities to determine the weights. Also, use the simple average of the required values obtained under the two methods in calculating WACC.)

    WACC1: fill in the blank %

    WACC2: fill in the blank %

 

Be the first to reply

Leave a Reply

Your email address will not be published.