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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 yield-to-maturity of a bond with at least 5 years left before maturity. Using the following table, calculate the firm’s after-tax cost of debt:

 Yield to Maturity 1 – Average Tax Rate After-tax 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 5-year treasury bond, and the return on the market calculated in Phase 2, you can calculate the cost of common equity using the following table:

 5-year Treasury Bond Yield (risk-free 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:

 After-Tax Cost of Debt Cost of Preferred Stock Cost of Common Equity WACC Unweighted Cost Weight of Component Weighted Cost of Component

• After completing the required calculations, explain your results in a Word document, and attach the spreadsheet showing your work. Be sure to explain the following:
• How would you expect the weighted average cost of capital (WACC) to differ if you had used market values of equity rather than the book value of equity, and why?
• What would you expect would happen to the cost of equity if you had to raise it by selling new equity, and why?
• If the after-tax cost of debt is always less expensive than equity, why don’t firms use more debt and less equity?
• What are some of the advantages and disadvantages of raising capital by using debt?
• How would “floatation costs” impacted the WACC, and how could they have been incorporated in the formula?

PHASE 5 Discussion Board

In this final Phase, you will be learning about the concept of the capital budgeting, the different techniques that are commonly employed in making capital budgeting decision, and how each is calculated. This concept, along with the time value of money concept and the cost of capital, will be employed in addressing the Phase 5 tasks and is related to the tasks that you completed in Phases 2 and 3.

In your initial post, identify and recommend at least 1 credible Web site that discusses the process of calculating the models most commonly used to support capital budgeting decisions, and address at least 3 of the following topics:

• What is the capital budgeting, and what role does it play in long-term investment decisions?
• What are the basic capital budgeting models, and which ones are considered the most reliable and why?
• What is net present value (NPV), how is it calculated, and what is the basic premise of its decision rule?
• What is the internal rate of return (IRR), how is it calculated, and what is the basic premise of its decision rule?
• What is the modified internal rate of return (MIRR), how is it calculated, and what is the basic premise of its decision rule?
• How is the weighted average cost of capital (WACC) employed in capital budgeting decisions, and should it be used for all project regardless of the riskiness of a project?

Be sure to document your posts with in-text citations, credible sources, and properly listed references.

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