Cost of Capital

Assuming a tax rate of 40%, calculate Zee Zee Inc.'s Weighted Average Cost of Capital (WACC).

After completing her estimate of Templeton’s WACC, the CFO decided to explore the possibility of adding more low-cost debt to the capital structure. With the help of the firm’s investment banker, the CFO learned that Templeton could probably push its use of debt to 37.5% of the firm’s capital structure by issuing more debt and retiring (purchasing) the firm’s preferred shares. This could be done without increasing the firm’s costs of borrowing or the required rate of return demanded by the firm’s common stockholders. What is your estimate of the WACC for Templeton under this new capital structure proposal?

Consider the preferred shares of Relay Company that are trading at $25 per share. What will be the cost of preferred equity if these stocks have a par value of $35 and pay an annual dividend of 4%?

How would the CFO determine the cost of the company’s equity, using the dividend growth model?

Prepare two additional estimates of Pearson’s cost of common equity using the dividend growth model where you use growth rates in dividends that are 25% lower and higher than the estimated 6.25% (i.e., for g equal to 5% and 7.81% respectively).