# 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

xxxxxxxxxxxxxxxxxxxxxxxSolution: | |

Calculating xxxx of xxxx | |

xx x | xxxxxx |

xxx = | 100000 |

xxxxxxxx rate = | 16.67% |

Calculating cost xx xxxxxx | |

xxxxx CAPM xxxxx | |

xxxx | xxxx |

xxxx free xxxx = | xx |

xxxxxxxx return x | xxx |

xxxxx xxxx xxxxx | |

xxxx xx equity x | Risk free xxxx + Beta x (Expected xxxxxx x xxxx xxxx xxxxx |

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

x | 15.51% |

xxxxx xxxxx | |

xxxxx xxxxx Assets | $2,000,000 |

xxxxx & xxxxxxxxxx debt | xxxxxxxx |

xxxxxx internal stock xxxxxx | $400,000 |

New common xxxxx xxxxxx | xxxxxxxxxx |

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

xxxxx Debt x | $600,000.00 |

xxxxx equity x | xxxxxxxxxxxxx |

xxxxx | xxxxxxxxxxxxx |

Calculating xxxxxxx | |

Debt | 30.00% |

xxxxxx | xxxxxx |

xxxx = | xxxxxx |

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# xxxxxx

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Cost of Equity:-

Cost xx xxxxxx is defined as the xxxxxx which xxxxxxxxxxxx xxxxxxx on xxxxx xxxxxxxxxxxx xx xx xxx xxxxxxxx rate of return xxx xxx xxxxxxxxxxx but it is xxxx for the company. xxxx of xxxxxx xxx be xxxxxxxxxx in two xxxxx xxxxxxxx valuation model xxx xxxxxxx Asset Pricing xxxxxx xxx the xxxx through which cost of equity is calculated.

Formulas for xxx both xxx xxxxxx xxx xxxxx below:-

CAPM xxxxxxx

xxx = xxxxxxxxxxxx

xx x Market return

xxx Risk xxxx xxxxxx

xxxxxxxxxx

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

Dividend Valuation xxxxxxx

k.e = xxxxxxxx xxx xxxxxxxxxxxxx xxxxxx value xx xxxxx x Growth rate of xxxxxxxxxx

xxxx of xxxxxx

xxxxx are xxx borrowing xxxxx xxxxxxx takes to xxxxxxx xxx xxxxxxx xxxxxxxxx they have xx pay xxxxxxxx xx xxxxx xxxxxxxxxx xx xxx cost xx xxxx xx xxxx interest which company has to xxx xx xxx borrowings and xxxxxxxx xx is xxxxx after xxx xx xx xx the xxx deductible xxxxxxxx

Reference:

Cost

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# xxxxxx

xxxxxxxxxxxxxxxxxxxxxx of Debt | |||

xxxx | x | ||

Interest rate | x xx xxxx formula | ||

xxxxxxxxxxxxx | |||

The x xx xxxx xxxxxxx xx | xxxxxxxxxxxx | xxxxxx | |

xxxx of xxxxxx | |||

xxxxxxxxxxxx | xxxxx | ||

xxxx to xx used as required xxxx xx return | |||

Debt | xxxxxx | 10.50% | xxxxxx |

xxxxxxx | 1400000 | 15.5% | xxxxxxx |

xxxxxxx | 14.0% |

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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 xxxxxxx xx the return which xxxxxxxxxxxx xxxxxxx xx xxxxx xxxxxxxxxxxx xx is xxx xxxxxxxx rate of return for xxx stockholder xxx it xx cost xxx xxx xxxxxxxx xxxx xx equity can be calculated xx two ways. Dividend xxxxxxxxx model xxx xxxxxxx Asset Pricing models are xxx ways through xxxxx cost xx xxxxxx is xxxxxxxxxxx

Formulas for the xxxx xxx models are given below:-

CAPM xxxxxxx

k.e x xxxxxxxxxxxx

Rm = xxxxxx xxxxxx

xxx Risk free xxxxxx

xxxxxxxxxx

xxxxx *defined at xxxxxxxxxxxx*. Retrieved xxxx xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Dividend Valuation Model:-

xxx = Dividend per share/Current Market xxxxx xx xxxxx x Growth rate xx xxxxxxxxxx

Cost xx xxxxxx

Debts are the xxxxxxxxx xxxxx xxxxxxx takes to finance the xxxxxxx therefore they have to pay interest on xxxxx xxxxxxxxxx So the cost xx debt xx xxxx interest xxxxx company has xx xxx xx xxx borrowings xxx normally xx xx taken after xxx xx xx xx the xxx deductible xxxxxxxx

Reference:

Cost

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# xxxxxx

xxxxxxxxxxxxxxCost of Debt | |||

xxxx | x | ||

xxxxxxxx rate | x xx PVIF xxxxxxx | ||

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

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

Cost xx Equity | |||

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

WACC to xx xxxx as xxxxxxxx rate xx xxxxxx | |||

xxxx | 600000 | 10.50% | 0.0315 |

Equitgy | 1400000 | xxxxx | 0.10857 |

xxxxxxx | xxxxx |

# xxxxxx

x# xxxxxx

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Cost of Debt

Cost xx debt = Interest xxxxxxxx

xxxxxxxxxx

Debts xxx the xxxxxxxxx xxxxx xxxxxxx takes to xxxxxxx the company therefore they have to xxx xxxxxxxx xx xxxxx xxxxxxxxxx So xxx xxxx of debt xx that interest xxxxx company has to xxx on the xxxxxxxxxx and normally xx xx taken after tax xx it is the tax deductible xxxxxxxxx

xxxxxxxxxxxx

Cost xx xxxx

xxxx

x

Interest rate

x in PVIF formula

xxxxxxxxxxxxx

xxx x xx PVIF formula xx

6.014773

xxxxxx

Cost of Equity (CAPM)

xxxx xx xxxxxx = (Rm-Rf)*Beta

Cost of xxxxxxxxxxxxxxxx xxxxxxxxx xxxxxx

xxxx of xxxxxx x Dividend per share/Current xxxxxx xxxxx xx stock x Growth xxxx xx dividends.

Definition

xxxx of xxxxxx xx defined as xxx return xxxxx xxxxxxxxxxxx require on their investments. xx xx the xxxxxxxx rate of return xxx the xxxxxxxxxxx but xx is cost for xxx company. xxxx xx xxxxxx xxx xx calculated in two xxxxx Dividend xxxxxxxxx model and xxxxxxx xxxxx Pricing models xxx the xxxx xxxxxxx xxxxx xxxx xx equity is calculated.

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

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Your assignment xx attached..Thanks xxx purchasing my this assignment!

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Cost xx Equity:-

xxxx xx equity xx defined as xxx return which xxxxxxxxxxxx require xx xxxxx investments. xx xx xxx xxxxxxxx xxxx xx return for xxx stockholder xxx it xx cost for the xxxxxxxx Cost xx xxxxxx can xx xxxxxxxxxx in two ways. xxxxxxxx xxxxxxxxx xxxxx and xxxxxxx Asset xxxxxxx models are xxx ways through which cost of xxxxxx is xxxxxxxxxxx

Formulas for the xxxx xxx models are xxxxx xxxxxxx

CAPM xxxxxxx

k.e = xxxxxxxxxxxx

xx = xxxxxx xxxxxx

xxx xxxx free return

Reference:

CAPM, *defined at investopedia*x Retrieved from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Dividend xxxxxxxxx xxxxxxx

xxx = xxxxxxxx per share/Current xxxxxx xxxxx xx xxxxx + Growth xxxx of dividends.

Cost of Debt:-

Debts are the borrowing xxxxx xxxxxxx xxxxx to xxxxxxx the company therefore xxxx xxxx to pay xxxxxxxx xx those xxxxxxxxxx So the xxxx of xxxx is xxxx interest which company has to xxx on xxx borrowings and normally it is taken xxxxx tax as it is xxx tax xxxxxxxxxx expense.

xxxxxxxxxx

Cost

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# Sheet1

xxxxxxxxxxx of Debt | |||

PVIF | x | ||

Interest xxxx | x xx xxxx xxxxxxx | ||

xxxxxxxxxxxxx | |||

xxx x xx PVIF formula is | 6.0147727404 | xxxxxx | |

Cost of xxxxxx | |||

xxxxxxxxxxxx | 15.5% | ||

WACC to be used as xxxxxxxx rate of xxxxxx | |||

Debt | xxxxxx | 10.50% | 0.0315 |

Equitgy | xxxxxxx | xxxxx | xxxxxxx |

2000000 | xxxxx |

# xxxxxx

# Sheet3

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xxxx of xxxx

xxxx of xxxx = xxxxxxxx Payments

Definition

xxxxx are the xxxxxxxxx xxxxx xxxxxxx takes xx finance the xxxxxxx xxxxxxxxx they have xx pay xxxxxxxx xx xxxxx borrowing. So the xxxx xx xxxx is xxxx interest xxxxx xxxxxxx has xx xxx on the borrowings and xxxxxxxx it xx xxxxx after tax as it xx the tax deductible expense.

Calculations

Cost xx Debt

xxxx

x

Interest rate

x xx PVIF xxxxxxx

xxxxxxxxxxxxx

xxx x xx PVIF formula xx

xxxxxxxx

xxxxxx

xxxx xx xxxxxxxxxxxxx

xxxx of xxxxxx = (Rm-Rf)*Beta

xxxx of xxxxxxxxxxxxxxxx Valuation Model)

xxxx of xxxxxx x xxxxxxxx per xxxxxxxxxxxxx xxxxxx value of xxxxx x Growth xxxx xx xxxxxxxxxx

xxxxxxxxxx

xxxx of xxxxxx xx xxxxxxx xx xxx return xxxxx stockholders xxxxxxx on xxxxx xxxxxxxxxxxx xx xx the xxxxxxxx rate xx return xxx xxx stockholder but it is cost for the company. Cost of xxxxxx can be calculated xx two ways. Dividend xxxxxxxxx xxxxx xxx xxxxxxx Asset Pricing xxxxxx are xxx xxxx through xxxxx cost xx equity xx xxxxxxxxxxx

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xxxx of Debt

xxxx of debt x Interest Payments

Definition

Debts xxx the borrowing xxxxx xxxxxxx takes to finance xxx company therefore they xxxx xx xxx interest on xxxxx xxxxxxxxxx So xxx xxxx of debt is that interest xxxxx xxxxxxx has xx xxx xx the borrowings and normally xx xx xxxxx xxxxx tax xx xx xx xxx xxx deductible xxxxxxxxx

Calculations

Cost of Debt

xxxx

x

Interest rate

x xx xxxx xxxxxxx

xxxxxxxxxxxxx

xxx x xx xxxx xxxxxxx xx

6.014773

10.50%

Cost of xxxxxxxxxxxxx

Cost xx equity = xxxxxxxxxxxxx

Cost xx xxxxxxxxxxxxxxxx xxxxxxxxx xxxxxx

Cost of xxxxxx = Dividend per share/Current Market value xx xxxxx x xxxxxx xxxx of xxxxxxxxxx

Definition

xxxx xx equity is defined as xxx return xxxxx stockholders require xx xxxxx investments. xx is xxx required rate xx xxxxxx for the xxxxxxxxxxx but xx is xxxx xxx xxx xxxxxxxx xxxx xx equity can be xxxxxxxxxx xx two xxxxx Dividend valuation model xxx xxxxxxx Asset Pricing models xxx the ways through xxxxx cost xx equity is calculated.

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# xxxxxx

xxxxxxxxxxxxxCost xx xxxx | |||

xxxx | 6 | ||

xxxxxxxx xxxx | x in xxxx xxxxxxx | ||

xxxxxxxxxxxxx | |||

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

Cost of xxxxxx | |||

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

WACC to be used as xxxxxxxx xxxx xx xxxxxx | |||

xxxx | xxxxxx | 10.50% | 0.0315 |

xxxxxxx | 1400000 | xxxxx | xxxxxxx |

xxxxxxx | xxxxx |

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