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6 Jan 2019

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For Kellog

Rating Fitch: BBB

Price 103.12

Coupon(%) 3.125

Maturity 17-May-2022

YTM(%) 2.661

Current yield(%) 3.030

Cost of Debt

-Use the yield to maturity from either your company’s actual bond or from the similarly rated company’s bond as an estimate for your company’s pre-tax cost of debt.

-Calculate your company’s after-tax cost of debt using a 35% marginal tax rate. (Pre-tax cost of debt)(1 – marginal tax rate). Note bond rating for each company.

Cost of Equity

-Estimate the cost of equity at least two ways:

CAPM (You must use CAPM as one of your methods.)

Reworked Gordon Model: (D1/P) + G

Bond yield + risk premium

-Remember to use the current RFR (10 year Treasury Bond). Assume Required Return on the Market is 11%. Get current stock price. Get estimated D1 and G from either Valueline or Yahoo Finance (analyst estimates).

-Decide on your best estimate of cost of equity to use in calculating WACC.

Calculate the Weights of each Component of the Company’s Capital Structure

-Look at the company’s balance sheet and assume their current capital structure is their target capital structure.

-Use only Long Term Debt and any Capitalized Leases in the weighting for debt.

-See if the company has any preferred stock to weight.

-Use total common shareholder’s equity for the weight of common equity.

Calculate the Company’s Weighted Average Cost of Capital (WACC).

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7 Jan 2019

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1) Foliage Company’s 10 year bonds, which have a coupon of 4%, currently trade in the market at a 4.8%yield to maturity. If its marginal tax rate is 35%, what is the company’s after-tax cost of debt?


2) Foliage Company’s investment bankers told the company that it could issue a preferred stock with adividend of $5.50 and a price of $98. Issuance costs would be 1.2%. What is the company’s cost ofpreferred stock?

3) Foliage Company’s future earnings and dividends are expected to grow at a constant rate of 3% peryear. Its common stock currently trades at $15 per share. It paid a dividend of $2 per share yesterday.The company has a beta of 1.75. The current risk free rate is 2%, and the required return on the marketis assumed to be 12%. The company can issue bonds at a 4.8% yield to maturity.
a) Calculate the firm’s cost of equity using CAPM.

b) Calculate the firm’s cost of equity using the Dividend Yield + Growth rate model.

c) Calculate the firm’s cost of equity using the Bond Yield + Risk premium approach (assume the mid
point of the risk premium range of 3-5%).

d) Based on the above, what do you want to assume for the company’s estimated cost of equity?

4) Assuming the company’s current capital structure is its target capital structure, if Foliage Companyhas the following capital structure, what is the firm’s weighted average cost of capital (WACC)? (Usehighest cost of equity estimate in your calculations.)
Debt $100,000,000

Preferred Stock 20,000,000

Common Stock 200,000,000

5) If Foliage changes its target capital structure to increase the amount of debt by 50% and reduce the
amount of common equity by 25% (and does this by borrowing $50,000,000 and using the borrowedfunds to retire $50,000,000 of common stock), what is its new WACC? Why did the WACC decline?

Northwest Utility Company faces increasing needs for capital. Fortunately, it has an Aa3 credit rating. The corporate tax rate is 40 percent. Northwest’s treasurer is trying to determine the corporation’s current weighted average cost of capital in order to assess the profitability of capital budgeting projects. Historically, the corporation’s earnings and dividends per share have increased about 8.2 percent annually and this should continue in the future. Northwest’s common stock is selling at $64 per share, and the company will pay a $6.50 per share dividend (D1). The company’s $96 preferred stock has been yielding 8 percent in the current market. Flotation costs for the company have been estimated by its investment banker to be $6 for preferred stock. The company’s optimum capital structure is 55 percent debt, 20 percent preferred stock, and 25 percent common equity in the form of retained earnings. Refer to the following table on bond issues for comparative yields on bonds of equal risk to Northwest. Data on Bond Issues Issue Moody’s Rating Price Yield to Maturity Utilities: Southwest Electric Power––7 1/4 2023 Aa2 $ 895.18 8.74 % Pacific Bell––7 3/8 2025 Aa3 891.25 8.73 Pennsylvania Power & Light––8 1/2 2022 A2 970.66 8.77 Industrials: Johnson & Johnson––6 3/4 2023 Aaa 880.24 8.55 % Dillard’s Department Stores––7 1/8 2023 A2 960.92 8.22 Marriott Corp.––10 2015 B2 1,035.10 9.77 a. Compute the cost of debt, Kd (use the accompanying table—relate to the utility bond credit rating for yield) (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of debt % b. Compute the cost of preferred stock, Kp. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of preferred stock % c. Compute the cost of common equity in the form of retained earnings, Ke. (Do not round intermediate calculations. Input your answer as a percent rounded to 2 decimal places.) Cost of common equity % d. Calculate the weighted cost of each source of capital and the weighted average cost of capital. (Do not round intermediate calculations. Input your answers as a percent rounded to 2 decimal places.) Weighted Cost Debt (Kd) % Preferred stock (Kp) Common equity (Ke) Weighted average cost of capital (Ka) %

Dinklage Corp. has 6 million shares of common stock outstanding. The current share price is $85, and the book value per share is $8. The most recent annual dividend, paid this morning, was $5.70 and the dividend growth rate is 4 percent.

The company also has two bond issues outstanding. The first bond issue has a face value of $65 million, a coupon rate of 8%, a yield to maturity of 8.50%, and sells for 95 percent of par. The second issue has a face value of $40 million, a coupon rate of 9%, a yield to maturity of 7.07%, and sells for 108 percent of par. The first issue matures in 23 years, the second in 5 years.

The tax rate is 38 percent. Calculate the company’s WACC.

Start by calculating the capital structure weights.

Do not round intermediate calculations. Enter your answer as a decimal rounded to 4 decimal places, e.g., 0.1617.

Debt to Assets

%
Equity to Assets %

Next, calculate the cost of equity and cost of debt to get the WACC.

Do not round intermediate calculations (i.e. use more than four decimal places when using the capital structure weights above). Enter the following answers as a percent rounded to 2 decimal places, e.g., 32.16.

Cost of Equity

%
After-tax Cost of Debt %
WACC %

What I need is in Bold

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