Calculating the WACC

14 Dec Calculating the WACC

Posted at 16:25h in Economics by

Calculating the WACC
Skye Computer Company: Balance Sheet as of December 31
(in thousands of dollars)
	2021
Current assets	$2,000
Net fixed assets	3,000
Total assets	$0
Accounts payable and accruals	$700
Short-term debt	200
Long-term debt	1,850
Preferred stock	400
Common stock	900
Retained earnings	950
Total common equity	$0
Total liabilities and equity	$0
Last year’s earnings per share	$2.60
Current price of common stock, P0	$50.00
Last year’s dividend on common stock, D0	$1.70
Growth rate of common dividend, g	10%
Flotation cost for common stock, F	11%
Common stock outstanding	40,000
Current price of preferred stock, Pp	$30.00
Dividend on preferred stock, Dp	$2.70
Preferred stock outstanding	15,000
Before-tax cost of debt, rd	10%
Market risk premium, rM – rRF	5%
Risk-free rate, rRF	6%
Beta	1.384
Tax rate	25%
Total debt	$2,050	thousand
a. Calculating the cost of each capital component (using the DCF method to find
the cost of common equity)			Formulas
After-tax cost of debt			ERROR:#N/A
Cost of preferred stock			ERROR:#N/A
Cost of retained earnings			ERROR:#N/A
Cost of new common stock			ERROR:#N/A
b. Calculating the cost of common equity from retained earnings, using the CAPM method
Cost of retained earnings			ERROR:#N/A
c. Calculating the cost of new common stock based on the CAPM
Flotation cost adjustment			ERROR:#N/A
Cost of new common stock			ERROR:#N/A
d. Calculating 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
	Market value (in thousands)	Weight	Market value (in thousands)	Weight
Total debt			ERROR:#N/A	ERROR:#N/A
Preferred stock			ERROR:#N/A	ERROR:#N/A
Сommon equity			ERROR:#N/A	ERROR:#N/A
Total			ERROR:#N/A	ERROR:#N/A
WACC1			ERROR:#N/A
WACC2			ERROR:#N/A

14 Dec Calculating the WACC

Sheet1

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