Phase 3 Cost of Capital - WACC Market Interest Rate a) What is the market interest rate on UPC's debt and its component cost of debt? Coupon rate 6% Coupons per year 1 Years to Maturity 15 Price...

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Review the WACC calculations in the attached Excel file. In your own words, do the following:



  • Explain the steps for deriving the WACC.

  • Discuss the challenges involved in deriving the WACC.

  • Rank and discuss other capital project evaluation techniques, and explain the reasoning behind your ranking.

400-600 words with references


Phase 3 Cost of Capital - WACC Market Interest Rate a) What is the market interest rate on UPC's debt and its component cost of debt? Coupon rate6% Coupons per year1 Years to Maturity15 Price$10,153.72 Face value$10,000 Tax rate30% N15 PV$10,153.72 PMT$600 FV$10,000 B-T rd5.8%Market Interest Rate A-T rd4.1%Cost of Debt Cost of Preferred Stock b) What is UPC's cost of preferred stock? Nominal dividend rate8% Dividends per year4 Par value$100 Price$111.10 rp7.20%Cost of Preferred Stock Cost of Common Stock c) What is UPC’s estimated cost of common equity using the CAPM approach? β1.2Beta rRF7%Risk Free Rate RPM6%Market Risk Premium rS 14.20%Cost of Common Stock Discounted Cash Flow Approach (DCF) d) What is the estimated cost of common equity using the DCF approach? Price$100 Current dividend$10.00 Constant growth rate5% D1 $10.45Dividend after Year 1 rs 14.95%Cost of Common Stock Cost of Common Stock e) What is the bond-yield-plus-risk-premium estimate for UPC’s cost of common equity? "Bond yield + RP" premiumGiven RP =3% ks =8.84% PART G f) What is your final estimate for rs? METHODESTIMATE CAPM14.20% DCF14.95% rd + RP8.84% Average12.66% WACC g) What is UPC’s overall, or weighted average cost of capital (WACC)? Structure wd30%A-T rd4.09% wp10%rp7.20%WACC =9.55% ws60%rs12.66%
005_3njm9zk-0x2mozj4.xlsx
Answered Same DayDec 20, 2021

Answer To: Phase 3 Cost of Capital - WACC Market Interest Rate a) What is the market interest rate on UPC's...

David answered on Dec 20 2021
124 Votes
Steps Used to derive Weighted Average Cost of Capital (WACC):-
Step 1:- First step in computation of WACC is to find the cost of debt, cost of preference share
and cost of equity and their respective weights in the capital structure.
Step 2:- Computation of cost of debt is done in the following manner:-
a) Write down the Coupon rate, periodicity of payment of interest, Years to maturity,
current price, Face value and tax rate of the bonds issued by the UPC.
b) Using the formula of rate compute the yield offered by the bonds (i.e. pre-tax cost of
debt) issued by the UPC, formula for computing rate is as follows,
“=rate (nper,pmt,pv,fv)”.
c) After determining the rate compute the after tax rate i.e. cost of debt by using the
following formula,
= Pre-tax cost of debt*(1-tax rate).
Step 3:- Now next step is to compute cost of preferred stock, it is very simple to compute the
cost of preferred stock. First calculate the amount of preference dividend to be paid by
multiplying par value of preferred stock with the percentage of dividend by the preferred stock,
the divide the resultant figure by the present market value of the stock. The figure derived is the
cost of preferred stock.
Step 4:- Next step in the calculation is to find the cost of...
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