Posted: October 21st, 2022
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 yieldtomaturity of a bond with at least 5 years left before maturity. Using the following table, calculate the firm’s aftertax cost of debt:
Yield to Maturity 
1 – Average Tax Rate 
Aftertax 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 5year treasury bond, and the return on the market calculated in Phase 2, you can calculate the cost of common equity using the following table:
5year Treasury Bond Yield (riskfree 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:
AfterTax Cost of Debt 
Cost of Preferred Stock 
Cost of Common Equity 
WACC 

Unweighted Cost 

Weight of Component 

Weighted Cost of Component 
Note: You can find information about the top 500 stocks at this Web site.
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;crossh
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