BUS 413 Lecture Notes - Lecture 1: Risk Premium, Capital Asset Pricing Model, Capital Structure

• School: Simon Fraser University
• Department: Business Administration
• Course: BUS 413
• Professor: jerome

Document Summary

30% debt; 5% preferred stock; 65% equity; rd = 6%; t = 30%; rps = 5. 8%; rs = 12%. Wacc = (wd)(rd)(1 t) + (wps)(rps) + (wce)(rs) Wacc = 0. 30(0. 06)(1-0. 30) + 0. 05(0. 058) + 0. 65(0. 12) = 9. 35%. The firm"s cost of equity should be estimated to be about 11. 3%, which is the average of the three methods. We also know that the d + e = investment substitute 1. 8e for d : 1. 8e + e = m. E = m: cost using rs, common equity needed: D = 100% 35. 7% = 64. 3% *7%(1 t) = 7%(0. 7) = 4. 9%: rs and the wacc will increase due to the flotation costs of new equity. Establish a set of market value capital structure weights. The short-term debt is taken at par value; therefore its market value is ,300,000. The long-term debt trades at 102 of par, therefore its market value is 102% ,000 .