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
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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file1.xls preview (37 words)
|xxxx of xxxx|
|Interest xxxx||x in PVIF xxxxxxx|
|The x xx PVIF xxxxxxx xx||6.0147727404||xxxxxx|
|Cost xx xxxxxx|
|xxxx xx xx xxxx xx required xxxx xx return|
file2.docx preview (342 words)
xxxx of Equity:-
xxxx xx equity xx xxxxxxx as xxx xxxxxx which xxxxxxxxxxxx xxxxxxx xx their investments. xx is xxx xxxxxxxx xxxx of xxxxxx for the xxxxxxxxxxx but xx is xxxx xxx the company. Cost of xxxxxx can xx calculated in two ways. xxxxxxxx xxxxxxxxx model and Capital xxxxx Pricing xxxxxx xxx the ways through which xxxx of xxxxxx is calculated.
Formulas xxx the xxxx the models xxx given xxxxxxx
k.e = (Rm-Rf)*beta
Rm = Market return
xxx xxxx free return
CAPM, xxxxxxx at xxxxxxxxxxxxx xxxxxxxxx from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx
Dividend xxxxxxxxx Model:-
k.e x xxxxxxxx xxx share/Current xxxxxx value xx xxxxx + xxxxxx xxxx of dividends.
Cost of Debt:-
Debts xxx xxx borrowing which company takes to finance the company therefore they have xx pay xxxxxxxx on xxxxx xxxxxxxxxx So the cost xx debt is xxxx xxxxxxxx which company xxx to xxx xx xxx borrowings xxx normally xx xx xxxxx xxxxx tax xx xx xx xxx xxx deductible xxxxxxxx
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file3.pptx preview (240 words)
xxxx xx Debt
Cost xx debt x xxxxxxxx Payments
Debts are xxx borrowing xxxxx company takes to finance xxx xxxxxxx xxxxxxxxx they xxxx xx pay xxxxxxxx on xxxxx borrowing. xx xxx xxxx of xxxx xx that interest which xxxxxxx xxx xx xxx on xxx xxxxxxxxxx xxx xxxxxxxx xx is taken after xxx xx xx xx the xxx xxxxxxxxxx expense.
xxxx of Debt
x in PVIF xxxxxxx
The x xx xxxx formula is
xxxx xx Equity (CAPM)
xxxx xx xxxxxx = (Rm-Rf)*Beta
xxxx of xxxxxxxxxxxxxxxx Valuation xxxxxx
Cost xx Equity = Dividend xxx share/Current xxxxxx xxxxx of xxxxx + xxxxxx xxxx of dividends.
Cost xx xxxxxx is xxxxxxx as the xxxxxx xxxxx stockholders require xx their xxxxxxxxxxxx xx xx the required rate xx return for xxx xxxxxxxxxxx but xx is xxxx xxx the xxxxxxxx Cost of xxxxxx xxx xx calculated in two xxxxx Dividend xxxxxxxxx model and Capital Asset Pricing models are xxx ways xxxxxxx xxxxx xxxx of xxxxxx xx xxxxxxxxxxx
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