YBLO
Jul 30, 2007, 11:10 PM
1) Global Technology’s capital structure is as follows:
Cost aftertax Weights Weighted Cost
Debt 35% 6.5% 30% 1.95%
Preferred stock 15 10.0% 10% 1.00%
Common equity 50 13.5% 60% 8.10%
Weighted average cost of capital 11.05%
The aftertax cost of debt is 6.5 percent; the cost of preferred stock is 10
percent; and the cost of common equity (in the form of retained earnings) is
13.5 percent.
Calculate Global Technology’s weighted average cost of capital in a manner
similar to Table 11-1 on page 313.
2) 11A-1. Assume that Rf = 5 percent and Km = 10.5 percent. Compute Kj for the
following betas, using Formula 11A-2.
a. 0.6 I used algebra to calculate Beta:
b. 1.3 Kj=Rf = B(Km-Rf)
c. 1.9 Kj - Rf = B(Km-Rf)
(Kj-Rf)/(Km-Rf) = B
a. (.6 - .05) / (.105 - .05) = 10.00
b. (1.3 - .05) / (.105 - .05) = 22.73
c. (1.9 - .05) / (.105 - .05) = 33.64
Kj Rf Km Beta
Required return on common stock Risk free rate of return Return in the market Volatility
a. 0.6 5.00% 10.50% 10.00
b. 1.3 5.00% 10.50% 22.73
c. 1.9 5.00% 10.50% 33.64
Cost aftertax Weights Weighted Cost
Debt 35% 6.5% 30% 1.95%
Preferred stock 15 10.0% 10% 1.00%
Common equity 50 13.5% 60% 8.10%
Weighted average cost of capital 11.05%
The aftertax cost of debt is 6.5 percent; the cost of preferred stock is 10
percent; and the cost of common equity (in the form of retained earnings) is
13.5 percent.
Calculate Global Technology’s weighted average cost of capital in a manner
similar to Table 11-1 on page 313.
2) 11A-1. Assume that Rf = 5 percent and Km = 10.5 percent. Compute Kj for the
following betas, using Formula 11A-2.
a. 0.6 I used algebra to calculate Beta:
b. 1.3 Kj=Rf = B(Km-Rf)
c. 1.9 Kj - Rf = B(Km-Rf)
(Kj-Rf)/(Km-Rf) = B
a. (.6 - .05) / (.105 - .05) = 10.00
b. (1.3 - .05) / (.105 - .05) = 22.73
c. (1.9 - .05) / (.105 - .05) = 33.64
Kj Rf Km Beta
Required return on common stock Risk free rate of return Return in the market Volatility
a. 0.6 5.00% 10.50% 10.00
b. 1.3 5.00% 10.50% 22.73
c. 1.9 5.00% 10.50% 33.64