# Assignment 2: Cost of Debt and Equity

Assignment 2: Cost of Debt and Equity

The manager of Sensible Essentials conducted an excellent seminar explaining debt and equity financing and how firms should analyze their cost of capital. Nevertheless, the guidelines failed to fully demonstrate the essence of the cost of debt and equity, which is the required rate of return expected by suppliers of funds.

You are the Genesis accountant and have taken a class recently in financing. You agree to prepare a PowerPoint presentation of approximately 6–8 minutes using the examples and information below:

Debt: Jones Industries borrows $600,000 for 10 years with an annual payment of $100,000. What is the expected interest rate (cost of debt)?

Internal common stock: Jones Industries has a beta of 1.39. The risk-free rate as measured by the rate on short-term US Treasury bill is 3 percent, and the expected return on the overall market is 12 percent. Determine the expected rate of return on Jones’s stock (cost of equity). Here are the details: Jones Total Assets $2,000,000

Long- & short-term debt $600,000

Common internal stock equity $400,000

New common stock equity $1,000,000

Total liabilities & equity $2,000,000

Develop a 10–12-slide presentation in PowerPoint format. Perform your calculations in an Excel spreadsheet. Cut and paste the calculation into your presentation. Include speaker’s notes to explain each point in detail. Apply APA standards to citation of sources. Use the following file naming convention: LastnameFirstInitial_M4_A2.ppt.

## Cost of debt and equity

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# xxxxxx

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx | |

xxxxxxxxxxx cost xx Debt | |

xx = | 600000 |

Pmt x | xxxxxx |

Expected rate x | xxxxxx |

Calculating xxxx of xxxxxx | |

xxxxx xxxx xxxxx | |

Beta | 1.39 |

Risk free xxxx = | 3% |

xxxxxxxx xxxxxx = | 12% |

xxxxx CAPM xxxxx | |

Cost xx equity x | Risk xxxx rate + Beta * (Expected return - risk free xxxxx |

x | 3%+1.39*(12%-3%) |

x | 15.51% |

xxxxx xxxxx | |

Jones xxxxx xxxxxx | $2,000,000 |

Long- & short-term xxxx | xxxxxxxx |

xxxxxx xxxxxxxx stock xxxxxx | xxxxxxxx |

xxx xxxxxx xxxxx equity | xxxxxxxxxx |

Total xxxxxxxxxxx & equity | $2,000,000 |

xxxxx xxxx = | xxxxxxxxxxx |

Total equity = | $1,400,000.00 |

Total | xxxxxxxxxxxxx |

Calculating xxxxxxx | |

xxxx | 30.00% |

xxxxxx | 70.00% |

xxxx x | 15.86% |

# xxxxxx

# xxxxxx

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Cost of xxxxxxxx

xxxx of xxxxxx is defined xx xxx return which xxxxxxxxxxxx require on xxxxx xxxxxxxxxxxx xx xx the required rate of xxxxxx for the xxxxxxxxxxx xxx xx is cost xxx the company. xxxx xx xxxxxx can xx calculated in two xxxxx xxxxxxxx valuation xxxxx xxx Capital Asset Pricing xxxxxx xxx the xxxx through xxxxx xxxx of equity is calculated.

Formulas for xxx both the models are given below:-

CAPM Model:-

k.e x (Rm-Rf)*beta

xx x xxxxxx return

xxx xxxx xxxx xxxxxx

Reference:

xxxxx *xxxxxxx xx investopedia*. Retrieved xxxx http://www.investopedia.com/terms/c/capm.asp

Dividend Valuation Model:-

xxx = Dividend xxx share/Current xxxxxx value xx xxxxx + xxxxxx xxxx xx dividends.

xxxx xx xxxxxx

xxxxx are the borrowing which xxxxxxx xxxxx to xxxxxxx the xxxxxxx therefore they xxxx to pay interest on xxxxx xxxxxxxxxx So the cost xx xxxx is that xxxxxxxx xxxxx xxxxxxx xxx xx xxx xx xxx xxxxxxxxxx xxx normally it xx xxxxx xxxxx xxx as xx is the xxx deductible expense.

Reference:

xxxx

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# Sheet1

xxxxxxxxxxxxxxxxxx xx xxxx | |||

xxxx | x | ||

xxxxxxxx xxxx | x xx xxxx xxxxxxx | ||

xxxxxxxxxxxxx | |||

xxx x in PVIF xxxxxxx xx | xxxxxxxxxxxx | 10.50% | |

xxxx of Equity | |||

3+1.39(12-3) | 15.5% | ||

xxxx to xx used xx required xxxx of xxxxxx | |||

Debt | xxxxxx | 10.50% | 0.0315 |

xxxxxxx | xxxxxxx | xxxxx | xxxxxxx |

2000000 | xxxxx |

# Sheet2

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## cost of equity

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cost of xxxxxx

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xxxx of Equity:-

xxxx xx xxxxxx is defined as the return xxxxx stockholders require xx xxxxx investments. It is the xxxxxxxx xxxx xx xxxxxx for the stockholder xxx xx xx cost for xxx company. Cost xx equity can xx calculated in two ways. xxxxxxxx xxxxxxxxx model and xxxxxxx Asset Pricing models are xxx xxxx through which cost of xxxxxx xx xxxxxxxxxxx

xxxxxxxx for xxx both the models are xxxxx below:-

xxxx xxxxxxx

k.e x (Rm-Rf)*beta

xx x xxxxxx xxxxxx

Rf= xxxx xxxx return

xxxxxxxxxx

CAPM, *xxxxxxx xx xxxxxxxxxxxx*. xxxxxxxxx from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Dividend Valuation xxxxxxx

xxx x xxxxxxxx per share/Current xxxxxx xxxxx xx stock + Growth rate of dividends.

xxxx of Debt:-

Debts xxx xxx xxxxxxxxx which xxxxxxx xxxxx to finance xxx company xxxxxxxxx they xxxx xx xxx xxxxxxxx xx xxxxx xxxxxxxxxx So xxx xxxx xx debt xx xxxx interest xxxxx xxxxxxx xxx to xxx on the xxxxxxxxxx and xxxxxxxx it xx taken xxxxx tax xx xx xx the tax deductible expense.

Reference:

xxxx

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# Sheet1

xxxxxxxxxxxxxxxxxxCost xx xxxx | |||

PVIF | x | ||

xxxxxxxx rate | x in PVIF xxxxxxx | ||

xxxxxxxxxxxxx | |||

xxx x xx xxxx xxxxxxx is | 6.0147727404 | 10.50% | |

Cost of xxxxxx | |||

xxxxxxxxxxxx | xxxxx | ||

xxxx xx xx xxxx xx required rate of xxxxxx | |||

Debt | 600000 | xxxxxx | xxxxxx |

xxxxxxx | 1400000 | xxxxx | xxxxxxx |

2000000 | xxxxx |

# xxxxxx

x# Sheet3

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xxxx xx Debt

xxxx of debt x xxxxxxxx xxxxxxxx

xxxxxxxxxx

Debts are xxx borrowing which xxxxxxx takes to xxxxxxx the xxxxxxx therefore xxxx xxxx to pay interest xx those borrowing. So xxx cost xx xxxx is that xxxxxxxx which xxxxxxx has to pay on xxx borrowings and normally it xx xxxxx after tax as it is xxx tax deductible xxxxxxxxx

xxxxxxxxxxxx

xxxx xx Debt

PVIF

x

xxxxxxxx rate

x xx PVIF xxxxxxx

xxxxxxxxxxxxx

xxx x xx xxxx xxxxxxx xx

6.014773

xxxxxx

Cost xx Equity (CAPM)

xxxx xx equity = (Rm-Rf)*Beta

xxxx of xxxxxxxxxxxxxxxx Valuation xxxxxx

Cost of xxxxxx x xxxxxxxx xxx share/Current Market xxxxx of xxxxx x xxxxxx xxxx of dividends.

xxxxxxxxxx

Cost xx xxxxxx is xxxxxxx as xxx xxxxxx which stockholders xxxxxxx on their xxxxxxxxxxxx It xx the xxxxxxxx xxxx of return xxx xxx stockholder but it xx xxxx xxx the xxxxxxxx Cost of equity xxx xx calculated in xxx xxxxx xxxxxxxx valuation model and Capital xxxxx xxxxxxx xxxxxx xxx the xxxx through xxxxx xxxx of equity xx calculated.

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## Cost of Debt and Equity(Complete Answer With PowerPoint Presentation)

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xxxx xx Equity:-

Cost of equity is xxxxxxx xx the xxxxxx which xxxxxxxxxxxx xxxxxxx on their xxxxxxxxxxxx xx xx the xxxxxxxx xxxx xx return for the stockholder but xx xx cost for xxx company. xxxx xx xxxxxx xxx xx calculated xx two ways. xxxxxxxx valuation xxxxx xxx xxxxxxx xxxxx xxxxxxx models are xxx ways xxxxxxx xxxxx cost of equity is calculated.

Formulas xxx xxx xxxx the xxxxxx are given below:-

CAPM xxxxxxx

k.e x xxxxxxxxxxxx

Rm x xxxxxx return

Rf= Risk xxxx xxxxxx

xxxxxxxxxx

xxxxx *defined xx investopedia*x xxxxxxxxx from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Dividend xxxxxxxxx xxxxxxx

xxx = Dividend xxx share/Current xxxxxx value of xxxxx + xxxxxx rate xx xxxxxxxxxx

xxxx of xxxxxx

xxxxx xxx xxx xxxxxxxxx xxxxx xxxxxxx xxxxx to finance the company xxxxxxxxx they xxxx to xxx xxxxxxxx on xxxxx borrowing. So xxx cost xx xxxx xx xxxx interest xxxxx xxxxxxx has to pay on the borrowings xxx normally xx is xxxxx xxxxx xxx xx it is xxx tax deductible expense.

xxxxxxxxxx

xxxx

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# Sheet1

xxxxxxxxxxxCost xx Debt | |||

PVIF | 6 | ||

Interest xxxx | x xx xxxx xxxxxxx | ||

xxxxxxxxxxxxx | |||

xxx x xx PVIF formula is | xxxxxxxxxxxx | xxxxxx | |

Cost xx xxxxxx | |||

3+1.39(12-3) | xxxxx | ||

WACC to be xxxx xx required rate of xxxxxx | |||

Debt | xxxxxx | xxxxxx | 0.0315 |

Equitgy | 1400000 | xxxxx | xxxxxxx |

2000000 | 14.0% |

# xxxxxx

x# xxxxxx

xfile3.pptx preview (247 words)

Cost xx xxxx

Cost xx debt = xxxxxxxx Payments

xxxxxxxxxx

xxxxx xxx xxx borrowing xxxxx xxxxxxx takes to xxxxxxx the xxxxxxx therefore xxxx have xx pay interest on those borrowing. So the xxxx xx xxxx xx xxxx xxxxxxxx xxxxx company has to xxx on the xxxxxxxxxx xxx xxxxxxxx xx xx xxxxx xxxxx xxx xx xx is the tax xxxxxxxxxx expense.

Calculations

Cost of xxxx

xxxx

6

xxxxxxxx xxxx

x in xxxx formula

1-1/1+x^10)/x

xxx x xx xxxx formula xx

xxxxxxxx

xxxxxx

xxxx of Equity (CAPM)

Cost xx xxxxxx = xxxxxxxxxxxxx

xxxx of Equity (Dividend xxxxxxxxx xxxxxx

Cost xx xxxxxx x Dividend xxx xxxxxxxxxxxxx Market xxxxx of stock + Growth xxxx of xxxxxxxxxx

xxxxxxxxxx

Cost of xxxxxx xx defined xx the xxxxxx xxxxx stockholders require xx xxxxx xxxxxxxxxxxx xx is xxx xxxxxxxx xxxx xx xxxxxx xxx the stockholder xxx xx is xxxx for xxx company. Cost of equity xxx be xxxxxxxxxx xx two ways. xxxxxxxx valuation model xxx Capital Asset xxxxxxx models xxx the xxxx xxxxxxx which cost xx equity xx xxxxxxxxxxx

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