Cost of Capital

What is the cost of equity capital appropriate for evaluating the free cash flow associated with this investment?

Our estimated cost of capital, 20.81%, is lower than Ricketts’ expected return, 30%-50%, thus the investment is worthy. However, it’s higher than other pessimistic members’ expected return, 10%-15%, making the decision more complex and requiring further valuation。

10. What is the correct capital structure and weighted average cost of capital for discounting the investment’s free cash flow. Assume a 35% tax rate. A correct response requires that you define capital structure and Weighted Average Cost of Capital (WACC) with a formula. When defining a term with a formula be sure that all the variables are also defined.

= Par value of preferred shares issued / Par value per share of preferred shares

Based on the suggestion that the focus should be on market values, compute the weights of debt, preferred stock, and common stock.

Therefore, the cost of common stock is obtained by using the dividends divided by the market price.

-Martin Industries just paid an annual dividend of $1.30 a share. The market price of the stock is $36.80 and the growth rate is 6.0 percent. What is the firm's cost of equity?

1. Determine the Weighted Average Cost of Capital (WACC) based on using retained earnings in the capital structure.

iii. Prepare a basic discounted cash flow analysis; i.e. compute incremental cash flows and a terminal value, and discount them at a weighted average cost of capital. Can you do a multiples-type analysis here as well?

* Compute the value with leverage, VL, by discounting the free cash flows of the investment using the WACC.

The redemption available after the third anniversary of the original issue date is weighted towards equity. This option guarantees that the investors will receive at least the principal back. The mandatory redemption behaves like debt because there is a definite maturity date. The protective covenants are also weighted toward debt because the risk is limited and gives priority to the Series B Preferred Stockholders. Dividends are usually associated with equity; however, in this case the dividends are behaving more like debt interest payments. The dividends are paid at a fixed 8%

From the above calculations, we find the total L/T debt + Preferred Stock Outstanding (in both US and Britain) = Vd = £5361.10M

Cost of Equity is the return that stockholders require for a company. A company’s cost of equity represents the compensation that the market demands in exchange for owning the assets and bearing the risk of ownership. Based on capital markets the cost of equity varies in direct relation to the assumed risk in that specific market. The distinctive of the firm is the sensitivity to market risk (β) which depends on everything from management to its business and capital structure. Therefore past performances and present conditions have a direct effect on the overall value. Applying calculations at a divisional level allows specified markets to be analysis based on present market conditions for that service or product. The formula used to calculate Cost of Equity is:

After all of the common stock has been issued, companies start to deal out preferred stock. A preferred stock is an important equity security that has properties as both equity and a debt instrument and is basically considered a hybrid instrument. Before the common stock owners, the preferred stock owners supplied their dividends. If the company ceases to do business, and liquidates, the preferred stock owners are repaid the money, in which they invested before the stockholders are balanced. The main disadvantages of preferred

Claim on income and assets: preference share is a senior security as compared to ordinary share. It has a prior claim on the company’s income in the sense that the company must first pay preference share dividend before paying the ordinary dividend.