fbpx

Key assignment – financial management

Don't use plagiarized sources. Get Your Assignment on
Key assignment – financial management
Just from $13/Page
Order Now

 

Your next assignment as a financial management intern is to apply the knowledge that you acquired while engaging in the cost of capital discussion that you had with your colleagues. In this task, you will be calculating the weighted cost of capital for a firm using the book value of the components and the concepts presented in this phase.

 

Using the most current annual financial statements from the company you analyzed in Phase 1, determine the percentage of the firm’s assets that are currently be financed with debt (total liabilities), preferred stock, and common stock (common equity). It is very possible that your firm will have very little or no preferred stock, so in this class, the percent would be “zero.” Your ratios should add up to 100%. You will also need to calculate the firm’s average tax rate using the income tax expense divided by the firm’s income before taxes. Use the following tables:

 

Company

Total Assets

Total Liabilities

Total Preferred Stock

Total Common Equity

Dollar Value

       

% of Assets

       

 

 

 

Company

Income before Tax

Income Tax Expense

Average Tax Rate (%)

       

 

The first component to determine is the cost of debt. You mentor suggests using the Web site that you used in the previous Phase to find the pretax yield-to-maturity of a bond with at least 5 years left before maturity. Using the following table, calculate the firm’s after-tax cost of debt:

 

Yield to Maturity

1 – Average Tax Rate

After-tax Cost of Debt

     

 

Now you will need to calculate the cost of preferred stock. You can use the following table:

 

Annual Dividend

Current Value of Preferred Stock

Cost of Preferred Stock (%)

     

 

To calculate the cost of common equity, you can use the CAPM model. Using current stock data, the yield on the 5-year treasury bond, and the return on the market calculated in Phase 2, you can calculate the cost of common equity using the following table:

 

5-year Treasury Bond Yield

(risk-free rate)

Stock’s Beta

Return on the Top 500 Stocks (market return)

Cost of Common Equity

       

 

Now, you can use the cost and ratios from above to calculate the firm’s weighted average cost of capital (WACC) using the following table:

 

 

After-Tax Cost of Debt

Cost of Preferred Stock

Cost of Common Equity

WACC

Unweighted Cost

       

Weight of Component

       

Weighted Cost of Component

       

 

  • After completing the required calculations, explain your results in a Word document, and attach the spreadsheet showing your work. Be sure to explain the following:

    • How would you expect the weighted average cost of capital (WACC) to differ if you had used market values of equity rather than the book value of equity, and why?

    • What would you expect would happen to the cost of equity if you had to raise it by selling new equity, and why?

    • If the after-tax cost of debt is always less expensive than equity, why don’t firms use more debt and less equity?

    • What are some of the advantages and disadvantages of raising capital by using debt?

    • How would “floatation costs” impacted the WACC, and how could they have been incorporated in the formula?

      Note: You can find information about the top 500 stocks at this Web site. http://finance.yahoo.com/echarts?s=%5egspc+interactive#{}

      Reference

      S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site: http://finance.yahoo.com/echarts?s=%5egspc+interactive#symbol=^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

      Be sure to document your paper with in-text citations, credible sources, and list of references used in proper APA format. Word document of 700–1,000 words with attached Excel Spreadsheet showing calculations

      ·  Determine the relationship between risk and return by calculating stock and portfolio variance.

      ·  Determine the firm’s cost of capital.

      ·  Use effective communication, team and problem-solving skills to collaborate on a project.

      Using the most current annual financial statements from the company you analyzed in Phase 1, determine the percentage of the firm’s assets that are currently be financed with debt (total liabilities), preferred stock, and common stock (common equity). It is very possible that your firm will have very little or no preferred stock, so in this class, the percent would be “zero.” Your ratios should add up to 100%. You will also need to calculate the firm’s average tax rate using the income tax expense divided by the firm’s income before taxes.

 

  • The first component to determine is the cost of debt. You mentor suggests using the Web site that you used in the previous Phase to find the pretax yield-to-maturity of a bond with at least 5 years left before maturity. Using the following table, calculate the firm’s after-tax cost of debt:

  • 2. Now you will need to calculate the cost of preferred stock. You can use the following table:

  • 3. To calculate the cost of common equity, you can use the CAPM model. Using current stock data, the yield on the 5-year treasury bond, and the return on the market calculated in Phase 2, you can calculate the cost of common equity using the following table:

  • 4. Now, you can use the cost and ratios from above to calculate the firm’s weighted average cost of capital (WACC) using the a table

  • After completing the required calculations, explain your results in a Word document, and attach the spreadsheet showing your work. Be sure to explain the following:

    • 1. How would you expect the weighted average cost of capital (WACC) to differ if you had used market values of equity rather than the book value of equity, and why?

    • 2. What would you expect would happen to the cost of equity if you had to raise it by selling new equity, and why?

    • 3. If the after-tax cost of debt is always less expensive than equity, why don’t firms use more debt and less equity?

    • 4. What are some of the advantages and disadvantages of raising capital by using debt?

  • How would “floatation costs” impacted the WACC, and how could they have been incorporated in the formula?

Calculate the price
Make an order in advance and get the best price
Pages (550 words)
$0.00
*Price with a welcome 15% discount applied.
Pro tip: If you want to save more money and pay the lowest price, you need to set a more extended deadline.
We know how difficult it is to be a student these days. That's why our prices are one of the most affordable on the market, and there are no hidden fees.

Instead, we offer bonuses, discounts, and free services to make your experience outstanding.
How it works
Receive a 100% original paper that will pass Turnitin from a top essay writing service
step 1
Upload your instructions
Fill out the order form and provide paper details. You can even attach screenshots or add additional instructions later. If something is not clear or missing, the writer will contact you for clarification.
Pro service tips
How to get the most out of your experience with Homework Writing Services
One writer throughout the entire course
If you like the writer, you can hire them again. Just copy & paste their ID on the order form ("Preferred Writer's ID" field). This way, your vocabulary will be uniform, and the writer will be aware of your needs.
The same paper from different writers
You can order essay or any other work from two different writers to choose the best one or give another version to a friend. This can be done through the add-on "Same paper from another writer."
Copy of sources used by the writer
Our college essay writers work with ScienceDirect and other databases. They can send you articles or materials used in PDF or through screenshots. Just tick the "Copy of sources" field on the order form.
Testimonials
See why 20k+ students have chosen us as their sole writing assistance provider
Check out the latest reviews and opinions submitted by real customers worldwide and make an informed decision.
Senior Services
Outstanding quality.
Customer 452441, April 13th, 2022
Finance/Acc related
Good work.
Customer 460073, July 9th, 2022
Business and administrative studies
It met expectations. Thanks!
Customer 463143, September 7th, 2022
Business and administrative studies
Good work,
Customer 462901, April 27th, 2022
Psychology
Good work.
Customer 459817, June 16th, 2022
Medicine
Very thorough and well written. Exceeded time frame slightly, but overall satisfied with the result.
Customer 454007, February 8th, 2020
Entertainment & Gaming
Great work.
Customer 452441, April 29th, 2022
Leadership Studies
excellent job
Customer 456821, July 30th, 2022
Business and administrative studies
Good work.
Customer 458115, May 24th, 2022
Technology
Good job after revision. Make Grammarly your tool.
Customer 462769, March 29th, 2022
Military
good job
Customer 456821, September 1st, 2022
Political science
Good comparison.
Customer 457487, April 17th, 2022
11,595
Customer reviews in total
96%
Current satisfaction rate
3 pages
Average paper length
37%
Customers referred by a friend
OUR GIFT TO YOU
15% OFF your first order
Use a coupon FIRST15 and enjoy expert help with any task at the most affordable price.
Claim my 15% OFF Order in Chat