# The manager of Sensible Essentials conducted an excellent seminar explaining debt and equity financing and how firms should analyze their cost of capital.

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.

By **Monday, August 20, 2012**, deliver your assignment to the **M4: Assignment 2 Dropbox**.

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## Assignment 2 Cost of Debt and Equity(Complete Answer With PowerPoint Presentation)

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Cost xx Equity:-

Cost of xxxxxx xx defined as the return which stockholders require on xxxxx xxxxxxxxxxxx xx is the required xxxx of return xxx xxx stockholder but xx is xxxx for the company. xxxx xx xxxxxx can xx calculated in two ways. xxxxxxxx valuation xxxxx and Capital Asset xxxxxxx models xxx the xxxx xxxxxxx xxxxx cost of xxxxxx xx calculated.

xxxxxxxx for xxx xxxx xxx models xxx given xxxxxxx

xxxx xxxxxxx

k.e x xxxxxxxxxxxx

Rm x Market xxxxxx

xxx xxxx xxxx return

Reference:

CAPM, *defined xx investopedia*. xxxxxxxxx from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxx Valuation xxxxxxx

xxx = xxxxxxxx per xxxxxxxxxxxxx xxxxxx value xx xxxxx x Growth rate xx dividends.

xxxx of Debt:-

Debts xxx the borrowing which company takes xx finance xxx company xxxxxxxxx they xxxx to pay xxxxxxxx xx those borrowing. xx xxx cost xx debt is that interest which xxxxxxx xxx to xxx on xxx xxxxxxxxxx and normally it is xxxxx xxxxx tax xx xx xx the tax xxxxxxxxxx expense.

Reference:

Cost

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# xxxxxx

xxxxxxxxxxxxxxCost xx xxxx | |||

PVIF | x | ||

Interest rate | x xx xxxx xxxxxxx | ||

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

The x in PVIF formula is | 6.0147727404 | xxxxxx | |

xxxx xx Equity | |||

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

xxxx xx xx used xx xxxxxxxx xxxx of return | |||

xxxx | xxxxxx | 10.50% | 0.0315 |

xxxxxxx | 1400000 | xxxxx | 0.10857 |

2000000 | 14.0% |

# Sheet2

# xxxxxx

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Cost of xxxx

Cost of debt = xxxxxxxx xxxxxxxx

xxxxxxxxxx

xxxxx xxx the xxxxxxxxx which xxxxxxx xxxxx to xxxxxxx xxx company xxxxxxxxx xxxx have xx pay xxxxxxxx on xxxxx xxxxxxxxxx So the xxxx of debt is xxxx interest xxxxx xxxxxxx has to pay on xxx borrowings xxx normally xx is taken xxxxx tax xx xx is the xxx deductible xxxxxxxxx

Calculations

xxxx xx Debt

xxxx

6

Interest rate

x xx PVIF xxxxxxx

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

The x in xxxx xxxxxxx xx

6.014773

10.50%

xxxx xx Equity (CAPM)

xxxx xx equity x (Rm-Rf)*Beta

Cost xx xxxxxxxxxxxxxxxx xxxxxxxxx xxxxxx

Cost xx xxxxxx = Dividend per share/Current Market xxxxx xx xxxxx x xxxxxx rate of dividends.

xxxxxxxxxx

xxxx xx equity xx xxxxxxx as xxx xxxxxx xxxxx stockholders require xx their investments. xx xx the required xxxx of return xxx the stockholder xxx xx xx xxxx for the company. xxxx of xxxxxx can xx calculated in two xxxxx Dividend xxxxxxxxx model and xxxxxxx Asset Pricing xxxxxx are the ways xxxxxxx which cost xx xxxxxx is calculated.

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## Essentials conducted an excellent seminar explaining

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Cost of Debt

xxxx xx xxxx x Interest xxxxxxxx

Definition

Debts xxx xxx xxxxxxxxx xxxxx company takes to xxxxxxx xxx xxxxxxx xxxxxxxxx they xxxx xx xxx interest on those xxxxxxxxxx So xxx xxxx xx debt xx xxxx xxxxxxxx which company xxx to xxx xx xxx borrowings xxx xxxxxxxx it xx xxxxx after tax xx it is xxx xxx deductible xxxxxxxxx

Calculations

xxxx of Debt

xxxx

x

Interest rate

x in PVIF xxxxxxx

xxxxxxxxxxxxx

The x in xxxx xxxxxxx is

6.014773

xxxxxx

xxxx of Equity (CAPM)

xxxx xx equity = (Rm-Rf)*Beta

xxxx of xxxxxxxxxxxxxxxx xxxxxxxxx xxxxxx

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

xxxxxxxxxx

Cost of equity is xxxxxxx xx xxx return which stockholders require xx xxxxx xxxxxxxxxxxx xx is the xxxxxxxx rate of return for xxx stockholder but it xx xxxx xxx xxx xxxxxxxx xxxx of xxxxxx can xx xxxxxxxxxx xx xxx xxxxx xxxxxxxx valuation xxxxx xxx xxxxxxx Asset xxxxxxx xxxxxx xxx the ways through which xxxx of xxxxxx is xxxxxxxxxxx

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# xxxxxx

xxxxxxxxxxxxxxxx of Debt | |||

PVIF | x | ||

xxxxxxxx xxxx | x xx xxxx xxxxxxx | ||

xxxxxxxxxxxxx | |||

xxx x xx xxxx xxxxxxx is | 6.0147727404 | xxxxxx | |

Cost of xxxxxx | |||

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

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

Debt | xxxxxx | xxxxxx | 0.0315 |

xxxxxxx | 1400000 | 15.5% | 0.10857 |

2000000 | xxxxx |

# Sheet2

# Sheet3

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Cost of Equity:-

Cost of xxxxxx xx defined xx the return xxxxx stockholders xxxxxxx on xxxxx investments. xx is the required xxxx xx xxxxxx for xxx xxxxxxxxxxx but xx xx xxxx for the company. Cost of equity can xx calculated xx xxx xxxxx xxxxxxxx xxxxxxxxx model xxx Capital xxxxx xxxxxxx models xxx xxx xxxx xxxxxxx xxxxx cost of equity is xxxxxxxxxxx

Formulas xxx xxx both xxx models xxx given xxxxxxx

xxxx xxxxxxx

k.e x (Rm-Rf)*beta

Rm x xxxxxx return

xxx xxxx free xxxxxx

Reference:

CAPM, *defined at xxxxxxxxxxxx*. Retrieved xxxx http://www.investopedia.com/terms/c/capm.asp

xxxxxxxx xxxxxxxxx Model:-

xxx = xxxxxxxx xxx share/Current Market value xx xxxxx x Growth xxxx xx xxxxxxxxxx

xxxx xx xxxxxx

Debts xxx xxx borrowing xxxxx company xxxxx to xxxxxxx xxx xxxxxxx therefore they xxxx to xxx interest xx those xxxxxxxxxx xx the cost xx debt is xxxx interest which xxxxxxx xxx to pay xx xxx borrowings xxx xxxxxxxx it is xxxxx xxxxx tax xx xx xx xxx xxx deductible xxxxxxxx

xxxxxxxxxx

Cost

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# Sheet1

xxxxxxxxxxxxxxxxxxxxxxxxxxxxx | |

Calculating cost xx Debt | |

xx x | xxxxxx |

Pmt x | 100000 |

xxxxxxxx rate x | 16.67% |

xxxxxxxxxxx xxxx of equity | |

Using xxxx xxxxx | |

xxxx | 1.39 |

xxxx xxxx rate x | xx |

Expected xxxxxx = | xxx |

Using CAPM xxxxx | |

xxxx xx equity x | Risk free rate x Beta * xxxxxxxxx xxxxxx - xxxx xxxx rate) |

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

x | 15.51% |

Using xxxxx | |

xxxxx xxxxx Assets | $2,000,000 |

Long- & xxxxxxxxxx debt | xxxxxxxx |

xxxxxx internal xxxxx equity | $400,000 |

xxx xxxxxx xxxxx equity | xxxxxxxxxx |

xxxxx liabilities & xxxxxx | xxxxxxxxxx |

Total xxxx x | xxxxxxxxxxx |

Total equity x | $1,400,000.00 |

xxxxx | $2,000,000.00 |

xxxxxxxxxxx xxxxxxx | |

Debt | xxxxxx |

Equity | xxxxxx |

xxxx x | 15.86% |

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# Sheet1

xxxxxxxxxxxxxxxxxxxxxxxxSolution: | |

Calculating cost xx Debt | |

PV x | 600000 |

Pmt = | xxxxxx |

xxxxxxxx rate = | 16.67% |

Calculating xxxx of xxxxxx | |

Using CAPM xxxxx | |

Beta | xxxx |

xxxx xxxx rate = | 3% |

xxxxxxxx return = | 12% |

xxxxx xxxx xxxxx | |

xxxx xx xxxxxx x | xxxx xxxx rate x Beta * xxxxxxxxx xxxxxx x xxxx xxxx rate) |

= | xxxxxxxxxxxxxxxx |

= | xxxxxx |

xxxxx xxxxx | |

xxxxx xxxxx xxxxxx | xxxxxxxxxx |

Long- & short-term debt | xxxxxxxx |

xxxxxx xxxxxxxx xxxxx xxxxxx | $400,000 |

New xxxxxx xxxxx equity | $1,000,000 |

Total xxxxxxxxxxx & xxxxxx | xxxxxxxxxx |

Total Debt = | xxxxxxxxxxx |

Total xxxxxx = | xxxxxxxxxxxxx |

xxxxx | xxxxxxxxxxxxx |

xxxxxxxxxxx xxxxxxx | |

Debt | xxxxxx |

xxxxxx | xxxxxx |

xxxx x | 15.86% |

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Cost of Equity:-

Cost xx xxxxxx is defined xx xxx return xxxxx stockholders require xx xxxxx investments. xx is xxx xxxxxxxx xxxx of return xxx xxx xxxxxxxxxxx xxx xx is cost xxx xxx company. xxxx of xxxxxx can be xxxxxxxxxx xx xxx xxxxx Dividend xxxxxxxxx model xxx Capital xxxxx Pricing xxxxxx xxx xxx xxxx through xxxxx xxxx xx equity xx xxxxxxxxxxx

xxxxxxxx xxx the both the xxxxxx xxx given below:-

xxxx Model:-

xxx = xxxxxxxxxxxx

xx x Market xxxxxx

xxx xxxx xxxx return

xxxxxxxxxx

xxxxx *defined at investopedia*. xxxxxxxxx from http://www.investopedia.com/terms/c/capm.asp

Dividend xxxxxxxxx xxxxxxx

k.e x Dividend per share/Current xxxxxx value xx stock + Growth rate xx xxxxxxxxxx

Cost of Debt:-

xxxxx xxx the borrowing which company xxxxx xx xxxxxxx xxx xxxxxxx therefore they have xx pay xxxxxxxx on xxxxx xxxxxxxxxx So the xxxx of xxxx is that xxxxxxxx which xxxxxxx xxx xx xxx xx xxx xxxxxxxxxx and normally it is taken after tax as xx is xxx tax deductible expense.

xxxxxxxxxx

xxxx

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# Sheet1

xxxxxxxxxxxxCost xx Debt | |||

PVIF | 6 | ||

xxxxxxxx xxxx | x in PVIF formula | ||

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

xxx x in PVIF formula xx | 6.0147727404 | 10.50% | |

Cost xx Equity | |||

xxxxxxxxxxxx | xxxxx | ||

WACC xx xx used xx required xxxx xx return | |||

Debt | 600000 | xxxxxx | 0.0315 |

xxxxxxx | 1400000 | xxxxx | 0.10857 |

2000000 | xxxxx |

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Debt xxx Equity Financing

Cost xx xxxx and Equity

Prepared xx xxxxxx xxxx

1

xxxx xx xxxx

xxxxxxx of Debt xxxxxxxxxxxxxxx Jones xxxxxxxxxx borrows $600,000 for xx years with xx annual xxxxxxx xx xxxxxxxxx xxxx xx xxx expected interest xxxx xxxxx xx debt)?

xxxxxxxx by Kumail Raza

2

xxx xx xxxxxxxxxx to be worthwhile, xxx expected return xx xxxxxxx must be greater than xxx xxxx of xxxxxxxx The cost xx xxxxxxx is xxx rate xx return that capital could be xxxxxxxx xx xxxx xx xx alternative investment of equivalent xxxxx xx a xxxxxxx xx of xxxxxxx xxxx to a company's average xxxxxxxx activities xx is xxxxxxxxxx to use the xxxxxxxxx xxxxxxx cost of xxxxxxx as a basis for the evaluation. A xxxxxxxxx xxxxxxxxxx typically include xxxx xxxx and equity, xxx must therefore xxxxxxxxx both the

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xxx Cost xx xxxxxxx

Sensible xxxxxxxxxx

Types xx xxxxxxxxx xxxxxxx that firms xxx

The xxxxxxxxx xxxxxxxx

xxx xxxx needs xxxxxxx to invest xx xxx xxxxxxx They xxx xx xxx xxxxxx Current xxxxxx and the xxxxx assets. xxxxxxx xxxxxx xxx xxxx in xx year and fixed xxxxxx xxxxxxx land, machinery, xxxxxxxxx xxxx xxxxxx for xxxx xxxx xxxx the company. xxx xxxxxxx xxx to xxxxx the financing xxxx the investment decisions. The current xxxxxx should be xxxxxxxx from xxxxxxx xxxxxxxxxxx & xxxxx assets xxxxxx xx financed xxxx the xxxx xxxx capital. There xxx xxxxxxx two xxxxxxxxxx xx xxxx term capital: xxxx and xxxxxxxxxxxx xx xxxx xx xxxxxxxx xxxx xxxxx xxx has xx be xxxxxxxx xxxxx xxxx Interest Equity xx xxx xxxxxxxxxx xx xxx xxxxxxxxxxxx xxxx remains xxx xxxx term xxx xxxx are rewarded by

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