Chapter 3: Weighted Average Cost of Capital Flashcards
Cost of Common Equity 2 approaches
- Dividend Growth Model
- Security Market Line (SML) / Capital Asset Pricing Model (CAPM)
Rate of return that investors holding shares in a firm required.
Cost of equity
The 3 cost of equity
- Cost of Common Equity (Re)
- Cost of Debt (Kd)
- Cost of Preffered Stock (Kp)
The formula of getting Common stock (Re) using discounted growth model
Re = (D1 / Po) + g
This rate of dividend we promised to the preferred stockholders.
Cost of Preferred Stock
The current price of Preffered stock is
Po = d/Kp
Formula of getting Kp
Kp = d/Po
Is the interest rate collected by the creditors of the fund. It must be cost of debt after tax.
Kd after tax = Kd (1 - t)
The formula for the Capital Asset Pricing Model
Re = Rf + B (Rm-Rf)
Formula of getting of Risk Premiumq
Rp = Rm - Rf
Suppose that Jollibee Foods Corp. is expected to pay a dividend of P0.70 per share next year and average dividend growth is found at 11.06% and current stock price (Po) is P136/share.
What is the Re?
found in Notebook
ABC price shares is at P40/share and expects dividend to grow at 5% each year. It paid dividend last year at P4/shares. Determine Re.
Found in notebook
The current price of XYZ Company is P300 per share. It will declare and pay dividend at P30 share next year. Average dividend growth is at 5%.
What is the cost of common of equity (Re)?
Found in notebook
ABC Company’s historical data on dividends:
2018= P32/share
2019 = P33
2020 = P33.50
2021 = P34.50
2022 = P35
a.) What is dividend growth rate (g)?
Found in notebook
ABC Company’s historical data on dividends:
2018= P32/share
2019 = P33
2020 = P33.50
2021 = P34.50
2022 = P35
b.) Assume Po = P400 per share and approved dividends is P35.20 to be distributed the ff. quarter. Find Re on Common Equity.
Found in Notebook
Suppose jollibee Foods Corp. is expected to pay dividend of P0.70/share next year and the current price is P136.00/share.
Find Re.
2019= 0.62
2018 = 0.60
2017 = 0.56
2016 = 0.45
2015 = 0.41
Found in Notebook
ABC Limited borrowed 200M from Bank D. The interest charged is 8% per year. Find Kd after tax. Tax is 30%.
Found in Notebook
In Beta, beyond 1.00 is ______
Risk
In Beta, below 1.00 is ________
not risk
The current price of the stock is P120 per share. The expected return market is 12%. This portfolio shows a beta of 0.90. The Philippine T-bills is at 4.5%.
Found in notebook
The current price of the stock is P120 per share. The expected return market is 12.5%. This portfolio shows a beta of 0.75. The Philippine T-bills is at 3.5%.
found in notebook
ABC Limited borrowed 200M from Bank D. The interest charged is 12% per year. Find Kd after tax. Tax is 30%.
Foun in Notebook
A 8.5% preferred stock is selling at P155/share. Find the cost of preferred equity. (Assume Par Values is P100).
Found in Notebook
The current price of the stock is P380 per share. The expected return on the market is 11.5%. This portfolio shows a beta of 1.22. The Philippine T-bills is at 3.5%.
Compute Re.
Found in Paper
ABC Limited borrowed 200M from Bank D. The interest charged is 10.5% per year. Find Kd after tax. Tax is 30%.
Find Kd.
Found in Paper
A 12.8% preffered stock is selling at P160/share. Find the cost of preferred equity. (Par Value is P120). Find Kp.
Found in Paper
Capital Structure Common Equity P500B, Preferred Equity P100B, and Debt Outstanding is P200B.
Find the WACC using data from 24, 25, & 26.
Found in Paper
Capital Structure Common Equity P15M (7.03%), Preferred Equity P5M (3.75%), and Debt Outstanding is P10M (5.6%).
Found in Notebook
Problem 1:
- Sunlight Company’s Price share is at P50 per share. It paid dividend of P4 per share last year and expects that dividends will continue to grow at 3%. Calculate the cost of equity on common stocks (Re).
Found in Paper
Problem 1:
- Sunlight Company borrowed P50M from Bank D. The interest charged is 7.5% per year. Find Kd after tax. Tax is 30%.
Found in Paper
Problem 1:
- A 5% preferred stock is selling at P200/share. Find the cost of preferred equity. Par Value is assumed to be P100 per share.
Fond in Paper
Problem 1:
- Below is the Capital Structure:
Common Equity: 60M
Preferred P20M
Outstanding Debt P20M
Using the Re, Kp, and Ke, computed in 1-3, find the WACC.
Found in Paper
Problem 2
An investor is contemplating a stock worth $100 per share today that pays a 3% annual dividend. The stock has a beta compared to the market of 1.3, which means it is riskier than a market portfolio. Also, assume that the risk-free rate is 3% and this investor expects the market price at 8%. An investor is contemplating a stock worth $500 per share today that pays a 3% annual dividend. The stock has a beta compared to the market of 1.25, which means it is riskier than a market portfolio. Also, assume that the risk-free rate is 3.5% and this investor expects the market price at 8%. Compute Re.
Found in paper
Compute the average dividend growth rate if the following data are available:
Dividend per share was
2019 = P1.50
2020 = P1.89
2021 = P2.10
2022 = P2.12
Found in Paper
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