DEBT/ASS

ETS

DEBT/E
Q.
%

AFTE
R
TAX
KD

EXPECT
ED EPS
(AND)
DPS $

ESTIMAT
ED BETA

Ke= (RF+(RMRF)b)
%

ESTIMAT
ED PRICE
$

WACC %

2.40
2.56
2.75
2.97
3.20
3.36
3.30

1.5
1.6
1.73
1.89
2.10
2.40
2.85

12
12.4
12.9
13.5
14.4
15.6
17.4

20
20.65
21.33
21.9
22.22
21.54
18.97

12
11.6
11.32
11.10
11.04
11.40
12.36

0
10
20
30
40
50
60

0
11.11
25
42.86
66.67
100
150

4.8
4.8
5
5.4
6
7.2
9

Assignment 3 (b)
Capital Structure and Leverage
Stock Price and Cost of Capital Estimates with Different Debt/Assets Ratios

Company pays all of its earnings as dividends, so EPS=DPS

We assume that RF=6% and RM=10%
Since all earnings are paid out as dividends, no retained earnings are put back into the
business, and growth in EPS and DPS is zero. Hence zero growth stock price model
will be used to calculate the price.
P0=DPS/Ke
WACC=WdKd (1-T) + (WeKe)
WACC= (D/A) Kd (1-T) + (1-D/A) Ke