Question

Ha Li Berries, a US-based Chinese agricultural company, has a pre-tax cost of long-term debt of 7.68%, the cost of preferred shares of 12.17%, and a beta of 1.41: market performance Measured by the NYSE Composite Index it is 11.94% and the one-year T-bill has an annual return of 3.18%. From their financial statements, they are known to have $ 560,000 in long-term debt, $ 280,000 in preferred stock, and $ 295,000 in common stock. The company's applicable tax rate is 34%.

Calculate:

1. Your cost of shares held (percentage response, no%, 2 decimal places).

2. Your capital weighted average = WACC (percent response, no%, 2 decimal places).

Answer 1

D E A B с 1 T-Bill (Risk free rate) 0.0318 2 Beta 1.41 3 NYSE Composite Index (Market Rate) 0.1194 4 Tax Rate 0.34 5 Pre-Tax cost of debt 0.0768 6 7 Capital Structure Cost Amount 8 Long-Term Debt =B5*(1-B4) 560000 9 Preferred Stock 0.1217 280000 10 Common Stock =B1+(B2*(B3-B1)) 295000 11 Total =SUM(C8:010) Weightage Weighted Avg Cost =C8/$C$11 =D8*B8 =C9/$C$11 =D9*B9 =C10/$C$11 =D10*B10 =SUM(E8:E10)

С D E B 3.18% 1.41 11.94% 34.00% 7.68% A 1 T-Bill (Risk free rate) 2 Beta 3 NYSE Composite Index (Market Rate) 4 Tax Rate 5 Pre-Tax cost of debt 6 7 Capital Structure 8 Long-Term Debt 9 Preferred Stock 10 Common Stock 11 Total Cost 5.06880% 12.17000% 15.53160% Amount Weightage Weighted Avg Cost 560,000.00 0.49339207 0.02500906 280,000.00 0.24669604 0.03002291 295,000.00 0.25991189 0.04036848 1,135,000.00 0.09540044

1) Cost of Equity = Risk Free Rate + [Beta * (Market Return - Risk free Rate)]
= 3.18% * [1.41 * (11.94% - 3.18%)]
Cost of Equity = 0.155316 or 15.5316%

2) Weighted Average Cost of Capital = (Weightage of Debt * Post-tax cost of debt) + (Weightage of equity * Cost of Equity) + (Weightage of Preferred stock * Cost of preferred stock)
Weighted Average Cost of Capital = 0.09540044 or 9.54%