Spreadsheet for Determining the Weighted Average Cost of Capital

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Name
Date

INPUTS USED IN THE SPREADSHEET

P0, the price of common stock

$50.00

Net Ppf, the price of preferred net of flotation costs

$30.00

Dpf, the dividend on preferred

$3.30

D0, the most recent common stock dividend

g the growth rate
rd, before-tax required return on debt
b, the firm's beta

$2.10
7%
10%

MRP, Market risk premium

0.83
6.0%

rRF, Risk free rate

Target capital structure from debt
Target capital structure from preferred stock
Target capital structure from common stock
Tax rate
Flotation cost for common

6.5%
45%
5%
50%
35%
10%

OUTPUT SECTION OF SPREADSHEET

a. Calculate the cost of each capital component, i.e., the after-tax cost of debt, the cost of preferred stock (including
flotation costs), the cost of equity (ignoring flotation costs) with the DCF method and the CAPM method.
Cost of debt (after-tax)

Formula

Cost of preferred stock (including flotation costs)

Formula

Cost of common equity, DCF (ignoring flotation costs)

Formula

Cost of common equity, CAPM (ignoring flotation costs) Formula

b. Calculate the cost of new stock, (i.e. including flotation costs) using the DCF model.
Formula

c. Using the target capital structure and assuming that it will not issue new equity,
what is the WACC?
Formula
d. Using the target capital structure, what is the weighted average cost of capital when using new equity?
Formula

e. Graphing the MCC and IOS. The inputs for the graph are in the table below.
Capital cost

Capital Range

9.20%
9.50%

$0-200,000
$200,000 and up

Investment Option
C
B
A
D
E

Rate of return
18.0%
14.0%
10.0%
9.5%
9.0%

Capital Required Cumulative Capital

$50,000
$50,000
$100,000
$150,000
$175,000
$325,000
$60,000
$385,000
$95,000
$480,000

f. Using the NPV and IRR functions provided by Excel, find the NPV and IRR for the project described below.
Project Cash Flows

Cost of Capital

-19500
3250
4560
6200
5575
6980
4270

12%

Year 0
Year 1
Year 2
Year 3
Year 4
Year 5
Year 6
The NPV is: Formula
The IRR is Formula

g. Practicing with relative and absolute addresses:

$4

1
2
3
4
5
6
7
8
9
10

2
3
4
5
6
7
8
9
10
11

Formula
Formula
Formula
Formula
Formula
Formula
Formula
Formula
Formula
Formula

Formula
Formula
Formula
Formula
Formula
Formula
Formula
Formula
Formula
Formula

Write a formula in cell C77 that multiplies the value in cell A77 by the value in cell B77.
Then COPY and PASTE the formula into c78:c86. This is RELATIVE addressing.
Write a formula in cell D77 that will multiply the value in cell B74 by the value in cell A77. The formual needs to recognize the
value in cell B74 as ALWAYS being the multiplier. Now COPY and PASTE the formula into D78:D86.
This is ABSOLUTE addressing.
Plot the data in range D51 to D55 using the data in range F51 to F55 for x-axis values. Your graph should look like the one provided
for Investment Opportunity Schedule.
Then, experiment with preparing a second graph like the one provided for WMCC and IOS Schedule.
Send an attached file of your solution to gpadgham@jsu.edu. Put your name and FIN475 in the subject line.
END OF SPREADSHEET

MCCand IOS Schedules

Investment Opportunity Schedule

Rate or Return & Cost of Capital

D
E

Marginal Cost of Capital

Optimal Capital
Budget

Amount of Capital