Explore BrainMass

Cost of components of capital


P0 $50.00
Net Ppf $30.00
Dpf $3.30
D0 $2.10
g 7%
B-T kd 10%
Skye's beta 0.83
Market risk premium, MRP 6.0%
Risk free rate, kRF 6.5%
Target capital structure from debt 45%
Target capital structure from preferred stock 5%
Target capital structure from common stock 50%
Tax rate 35%
Flotation cost for common 10%

a. Calculate the cost of each capital component, i.e., the after-tax cost of debt, the cost of preferred stock (including flotation costs), the cost of equity (ignoring flotation costs) with the DCF method and the CAPM method.
b. Calculate the cost of new stock using the DCF model.
c. What is the cost of new common stock, based on the CAPM? (Hint: Find the difference between ke and ks as determined by the DCF method, and add that differential to the CAPM value for ks.

See attached file for full problem description.


Solution Summary

Calculates cost of components of capital-debt, equity, preferred stock.