Cost of Capital Computations

Question 1

Weighted Average Cost of Capital

Answer 1

(Cost of Equity X % equity structure) + (Cost of Debt X After Tax debt structure)

A = L + E

Question 2

After Tax Cost Debt

Answer 2

Yield to Maturity (Market Rate) X (1-Tax rate)

Question 3

Weighted Average Interest Rate

Answer 3

Effective annual interest payment (Par X coupon rate) (outflow)/NET Inflow

Question 4

Cost of Preferred Stock

Answer 4

Preferred Stock Dividends (par x %) (outflow)/Net Proceeds of Preferred Stock (Inflow) (selling price minus fixed costs)

Question 5

Cost of Retained Earnings (CAPM)

Answer 5

Risk Free Rate + Risk Premium

Risk Free Rate + Beta (Market premium - Risk Free Rate)

Question 6

Cost of Retained Earnings using the Common Stock (Discount Cash Flows)

Answer 6

(Dividend expected at end of year/Current Price) + Constant Rate of Growth

Question 7

Cost of Retained Earnings using the Bond Yield Risk Premium

Answer 7

Pretax cost of long term debt + Market Risk Premium