Fundamentals of Financial Management (Brigham Houston- 13th Edition)

Chapter 10

The Cost of Capital

10-1

After Tax cost of debt = rd  (1 – T)

= 12%  (1 – 0.35)

= 7.80%

m
er as
co
10-2

eH w
Cost of preferred stock, rp = Dp / Pp

o.
rs e
ou urc
= $3.80 / $47.50

=8%
o
aC s

10-3
vi y re

Cost of common stock

ed d

WACC = wdrd (1 – T) + wprp + wcrs

ar stu

9.96% =0.40 9% (1 – 0.40) + 0 + 0.60 rs

9.96% = 0.0126 + 0.60 rs
sh is

rs = 13%
Th

10-4

a) Retained Earnings, rs = D1 / P0 + g
=$3.00 / $30 + 0.05
= 15%

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 b) Cost of Equity, re = D1 / P0 – Flotation Cost + g
= D1 / P0 (1 – F) + g
= $3 / $30 (1 – 0.10) + 0.05
=16.11%

10-6

a) Cost of Equity, rs = D1 / P0 + g
=$2.14 / $23 + 0.07
= 16.30%

b) Cost of Equity using CAPM, rs = rf + b ( rm – rf )

m
er as
=9% + 1.6% ( 13 – 9)

co
= 15.4%

eH w
c) rs = Bond Rate + Risk Premium

o.
rs e
ou urc
= 12% + 4%

= 16%
o
aC s

10-7 a)
vi y re

rs = D1 / P0 + g
=$3.18 / $36 + 0.06
ed d
ar stu

= 14.83%

b) % of flotation cost = (36 – 32.40) / 36

sh is
Th

=10%

c)
re = D1 / P0 – Flotation Cost + g
= 3.18 / 32.40 (1 –0.40) + 0.06
=16.90%

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 10-8 rs =$2.00  1.07/ $22.50 + 0.07
= 16.5%
WACC = wdrd (1 – T) + wprp + wcrs
=0.40 12% (1 – 0.40) + 0 + 0.60 16.5
= 2.88 + 9.9
= 12.78%
10-12

a) Cost of Common Equity,

rs = D1 / P0 + g
=$2.00(1.04) / $20 + 0.04

m
er as
= 14.4%

co
b)

eH w
o.
WACC = 0.45 10% (1 – 0.40) + 0.55 14.4%
rs e
= 2.70 + 7.92
ou urc
= 10.62%
c) If the new project is more risky than the existing business, then finance manager will raise the
o

WACC with subjective assumption.

aC s
vi y re

IRR should be more than WACC. So we should accept the Project A.

ed d
ar stu

WACC Project A Project B

10.62% 13% 10%
sh is
Th

10-18

a) Cost of Equity,
rs = D1 / P0 + g
=$3.50 / $36 + 0.06
= 15.72%

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 b) WACC = wdrd (1 – T) + wprp + wcrs
=0.15 10% (1 – 0.30) + ($5 / $49)  10% + 0.75 15.72%
= 1.05 + 1.02 + 11.79
= 13.86%

c) If the new project is more risky than the existing business, then finance manager will raise the
WACC with subjective assumption.

m
er as
WACC Project 1 Project 2 Project 3 Project 4

co
10.62% 13% 10%

eH w
o.
rs e
ou urc
o
aC s
vi y re
ed d
ar stu
sh is
Th

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