Description
Week 4 Mini Case
Complete the Chapter 9 Mini-case on page 411 in your textbook. After reading the case, you will complete questions A through D only. In addition to your textbook, please provide at least two scholarly sources to support your answers.
Business School Assignment Instructions
The requirements below must be met for your paper to be accepted and graded:
Write between 750 – 1,250 words (approximately 3 – 5 pages) using Microsoft Word in APA style.
Use font size 12 and 1” margins.
Include cover page and reference page.
At least 80% of your paper must be original content/writing.
No more than 20% of your content/information may come from references.
Use at least three references from outside the course material; one reference must be from EBSCOhost. Text book, lectures, and other materials in the course may be used, but are not counted toward the three reference requirement.
Cite all reference material (data, dates, graphs, quotes, paraphrased words, values, etc.) in the paper and list on a reference page in APA style.
Start with the partial model in the file Ch09 P18 Build a Model.xlsx on the textbook’s Web site. The stock of Gao Computing sells for $50, and last year’s dividend was $2.10. A flotation cost of 10% would be required to issue new common stock. Gao’s preferred stock pays a dividend of $3.30 per share, and new preferred stock could be sold at a price to net the company $30 per share. Security analysts are projecting that the common dividend will grow at a rate of 7% a year. The firm can issue additional long-term debt at an interest rate (or a before-tax cost) of 10%, and its marginal tax rate is 35%. The market risk premium is 6%, the risk-free rate is 6.5%, and Gao’s beta is 0.83. In its cost-of-capital calculations, Gao uses a target capital structure with 45% debt, 5% preferred stock, and 50% common equity.
- Calculate the cost of each capital component—in other words, the after-tax cost of debt, the cost of preferred stock (including flotation costs), and the cost of equity (ignoring flotation costs). Use both the CAPM method and the dividend growth approach to find the cost of equity.
- Calculate the cost of new stock using the dividend growth approach.
- What is the cost of new common stock based on the CAPM? (Hint: Find the difference between re and rs as determined by the dividend growth approach and then add that difference to the CAPM value for rs.)
- Assuming that Gao will not issue new equity and will continue to use the same target capital structure, what is the company’s WACC?
