Overview
Hello,
Please answer questions 1-3 on the provided excel sheet. See below for helpful notes
You may adjust the spacing on each sheet to show your work or add additional sheets to show your work for set of questions within each problem. ALL calculations, and figures must be provided in your assignment, where applicable.
for the two Problems related to Debt Financing, you can use the PV formula (Problem 1) and the RATE formula (Problem 2 and 3).
For the Problems related to Equity Financing, you will first need to find, given the current stock price, the stocks constant growth rate. The formula is as follows:
E(g) = [(P0 * R(Rs)] - D0 / DO+PO
E(g) refers to the expected growth rate
PO refers to the current stock price
DO refers to the dividend
R(Rs) refers to the required rate of return
Now, under the constant growth assumptions, stock price increases each year at the growth rate, E(g), you can determine the stock price in 5 years.
For the exercise related to Debt Financing, the corporate cost of capital is merely the weighted average (blend) of the component costs.
Corporate Cost of Capital = [wd*R(Rd) * (1-T)] + [we * R(Re)]
wd refers to debt
R(Rd) refers to cost of debt
T value of 0
we refers to equity
R(re) refers to the cost of equity