# 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**.

## Essentials conducted an excellent seminar explaining

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xxxx of xxxx

xxxx xx xxxx x Interest xxxxxxxx

Definition

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

xxxxxxxxxxxx

Cost xx Debt

xxxx

x

Interest rate

x in PVIF formula

xxxxxxxxxxxxx

The x in PVIF xxxxxxx xx

xxxxxxxx

10.50%

Cost of Equity (CAPM)

Cost xx xxxxxx x (Rm-Rf)*Beta

Cost of xxxxxxxxxxxxxxxx Valuation xxxxxx

xxxx of xxxxxx = Dividend xxx share/Current xxxxxx xxxxx of xxxxx x xxxxxx rate of dividends.

xxxxxxxxxx

Cost xx equity xx defined xx the xxxxxx xxxxx stockholders xxxxxxx xx xxxxx xxxxxxxxxxxx xx xx xxx xxxxxxxx rate of return for the xxxxxxxxxxx xxx xx is cost xxx the company. Cost of equity can be calculated in xxx xxxxx Dividend xxxxxxxxx xxxxx and xxxxxxx Asset Pricing models are xxx ways xxxxxxx xxxxx xxxx of equity is calculated.

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# xxxxxx

xxxxxxxxxxxxxxx xx Debt | |||

PVIF | x | ||

xxxxxxxx xxxx | x xx xxxx formula | ||

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

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

xxxx of Equity | |||

xxxxxxxxxxxx | 15.5% | ||

xxxx to xx xxxx as required xxxx xx xxxxxx | |||

Debt | xxxxxx | xxxxxx | 0.0315 |

xxxxxxx | 1400000 | xxxxx | 0.10857 |

2000000 | xxxxx |

# xxxxxx

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Cost of Equity:-

xxxx xx xxxxxx is xxxxxxx xx the xxxxxx xxxxx stockholders require on their xxxxxxxxxxxx It is xxx xxxxxxxx xxxx of return xxx the xxxxxxxxxxx xxx it xx xxxx xxx the company. Cost xx xxxxxx xxx xx xxxxxxxxxx xx two xxxxx Dividend xxxxxxxxx xxxxx and xxxxxxx Asset xxxxxxx xxxxxx xxx the xxxx xxxxxxx which cost xx xxxxxx xx xxxxxxxxxxx

xxxxxxxx for xxx xxxx xxx models xxx xxxxx below:-

CAPM Model:-

xxx x xxxxxxxxxxxx

xx x xxxxxx xxxxxx

xxx xxxx xxxx xxxxxx

Reference:

CAPM, *xxxxxxx at xxxxxxxxxxxx*. Retrieved from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

xxxxxxxx xxxxxxxxx Model:-

k.e = xxxxxxxx xxx xxxxxxxxxxxxx Market value of xxxxx x xxxxxx xxxx xx xxxxxxxxxx

Cost xx Debt:-

xxxxx are the borrowing xxxxx xxxxxxx xxxxx xx xxxxxxx the xxxxxxx therefore xxxx xxxx xx pay interest xx those xxxxxxxxxx xx the cost xx debt is that xxxxxxxx xxxxx company has to pay on xxx borrowings xxx xxxxxxxx it xx xxxxx xxxxx tax xx xx xx xxx tax deductible xxxxxxxx

xxxxxxxxxx

Cost

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# Sheet1

xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx | |

Calculating cost xx xxxx | |

xx = | 600000 |

xxx = | 100000 |

Expected xxxx x | 16.67% |

xxxxxxxxxxx cost of xxxxxx | |

Using CAPM xxxxx | |

xxxx | xxxx |

xxxx free xxxx x | 3% |

xxxxxxxx return x | xxx |

xxxxx CAPM xxxxx | |

Cost xx equity = | Risk free xxxx + xxxx * (Expected return - xxxx free rate) |

x | xxxxxxxxxxxxxxxx |

= | xxxxxx |

Using WACC: | |

Jones Total xxxxxx | $2,000,000 |

xxxxx & xxxxxxxxxx debt | xxxxxxxx |

Common xxxxxxxx xxxxx xxxxxx | xxxxxxxx |

New xxxxxx stock equity | xxxxxxxxxx |

xxxxx liabilities & xxxxxx | xxxxxxxxxx |

Total Debt = | xxxxxxxxxxx |

Total xxxxxx = | $1,400,000.00 |

xxxxx | $2,000,000.00 |

xxxxxxxxxxx weights | |

Debt | 30.00% |

xxxxxx | xxxxxx |

xxxx = | xxxxxx |

# Sheet2

# xxxxxx

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

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Your assignment xx attached..Thanks xxx xxxxxxxxxx xx xxxx assignment!

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Cost of Equity:-

xxxx of equity is defined xx xxx xxxxxx which xxxxxxxxxxxx xxxxxxx on xxxxx investments. It is the xxxxxxxx rate of xxxxxx xxx xxx stockholder xxx it is xxxx xxx the company. Cost of equity can xx xxxxxxxxxx in xxx ways. Dividend valuation xxxxx xxx Capital xxxxx Pricing xxxxxx xxx the ways through xxxxx xxxx xx xxxxxx is calculated.

Formulas xxx the xxxx xxx xxxxxx xxx given below:-

xxxx Model:-

xxx x (Rm-Rf)*beta

Rm = Market xxxxxx

Rf= Risk free xxxxxx

Reference:

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

Dividend xxxxxxxxx xxxxxxx

xxx x Dividend xxx xxxxxxxxxxxxx Market xxxxx of stock x xxxxxx rate of xxxxxxxxxx

xxxx of xxxxxx

Debts are xxx borrowing which xxxxxxx takes xx xxxxxxx the xxxxxxx xxxxxxxxx they have xx pay xxxxxxxx on those xxxxxxxxxx So xxx cost xx debt xx xxxx xxxxxxxx xxxxx xxxxxxx has xx pay on the xxxxxxxxxx xxx normally it xx xxxxx after tax as xx is xxx tax xxxxxxxxxx expense.

Reference:

xxxx

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# xxxxxx

xxxxxxxxxxxxxxxxxxCost xx Debt | |||

PVIF | x | ||

xxxxxxxx xxxx | x in xxxx formula | ||

xxxxxxxxxxxxx | |||

xxx x xx xxxx formula is | xxxxxxxxxxxx | 10.50% | |

xxxx xx xxxxxx | |||

xxxxxxxxxxxx | 15.5% | ||

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

Debt | 600000 | xxxxxx | xxxxxx |

Equitgy | 1400000 | xxxxx | 0.10857 |

2000000 | xxxxx |

# xxxxxx

x# xxxxxx

xfile3.pptx preview (240 words)

xxxx xx Debt

xxxx of xxxx = xxxxxxxx xxxxxxxx

xxxxxxxxxx

Debts are xxx borrowing xxxxx company takes xx finance xxx company therefore xxxx xxxx xx pay xxxxxxxx on those borrowing. So the cost xx xxxx is xxxx interest which company xxx to xxx xx the borrowings xxx xxxxxxxx xx is taken after tax as xx xx xxx tax deductible xxxxxxxxx

xxxxxxxxxxxx

xxxx xx xxxx

xxxx

x

xxxxxxxx rate

x in xxxx xxxxxxx

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

The x xx xxxx formula is

xxxxxxxx

10.50%

xxxx xx xxxxxxxxxxxxx

xxxx of xxxxxx = xxxxxxxxxxxxx

xxxx of Equity (Dividend xxxxxxxxx Model)

Cost xx xxxxxx x xxxxxxxx xxx xxxxxxxxxxxxx Market value of xxxxx x xxxxxx rate xx dividends.

xxxxxxxxxx

xxxx xx equity xx xxxxxxx xx the return which stockholders require xx xxxxx investments. xx xx the xxxxxxxx rate xx xxxxxx xxx the xxxxxxxxxxx xxx xx xx xxxx for the company. Cost xx xxxxxx xxx xx calculated in xxx xxxxx Dividend valuation model xxx xxxxxxx Asset xxxxxxx xxxxxx xxx xxx xxxx through xxxxx xxxx of xxxxxx is calculated.

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# Sheet1

xxxxxxxxxxxxxxxxxxxxxxxSolution: | |

Calculating cost of Debt | |

xx = | 600000 |

xxx x | xxxxxx |

xxxxxxxx rate = | 16.67% |

xxxxxxxxxxx xxxx of equity | |

Using CAPM xxxxx | |

Beta | 1.39 |

Risk free rate x | 3% |

xxxxxxxx return = | xxx |

xxxxx CAPM xxxxx | |

Cost of xxxxxx = | xxxx xxxx xxxx x xxxx x (Expected xxxxxx - risk free rate) |

= | xxxxxxxxxxxxxxxx |

x | 15.51% |

Using WACC: | |

xxxxx Total xxxxxx | xxxxxxxxxx |

xxxxx & xxxxxxxxxx debt | xxxxxxxx |

Common xxxxxxxx xxxxx xxxxxx | xxxxxxxx |

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

Total xxxxxxxxxxx & xxxxxx | xxxxxxxxxx |

xxxxx Debt x | xxxxxxxxxxx |

xxxxx xxxxxx x | xxxxxxxxxxxxx |

Total | xxxxxxxxxxxxx |

Calculating xxxxxxx | |

Debt | 30.00% |

Equity | 70.00% |

WACC x | xxxxxx |

# xxxxxx

# xxxxxx

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xxxx of xxxxxxxx

Cost xx equity is defined xx the xxxxxx which stockholders xxxxxxx xx their investments. It xx the required xxxx xx xxxxxx xxx xxx xxxxxxxxxxx but xx is cost xxx xxx xxxxxxxx xxxx of equity xxx xx xxxxxxxxxx in two ways. xxxxxxxx valuation xxxxx xxx xxxxxxx xxxxx xxxxxxx xxxxxx are xxx xxxx xxxxxxx xxxxx xxxx xx equity is xxxxxxxxxxx

Formulas for the xxxx xxx xxxxxx xxx xxxxx xxxxxxx

xxxx Model:-

xxx = xxxxxxxxxxxx

Rm = xxxxxx xxxxxx

Rf= xxxx xxxx return

xxxxxxxxxx

CAPM, *defined at xxxxxxxxxxxx*x Retrieved from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Dividend Valuation Model:-

k.e = Dividend per share/Current xxxxxx value of xxxxx x Growth xxxx xx dividends.

Cost xx Debt:-

xxxxx are xxx xxxxxxxxx xxxxx xxxxxxx xxxxx xx finance the company xxxxxxxxx they xxxx xx xxx xxxxxxxx on xxxxx borrowing. xx the xxxx of xxxx is xxxx interest which xxxxxxx has to xxx on xxx xxxxxxxxxx xxx xxxxxxxx it is xxxxx after xxx as xx xx xxx tax xxxxxxxxxx xxxxxxxx

xxxxxxxxxx

xxxx

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# Sheet1

xxxxxxxxxxxxxxxxxxxxx of xxxx | |||

PVIF | 6 | ||

Interest rate | x xx xxxx xxxxxxx | ||

xxxxxxxxxxxxx | |||

The x xx PVIF xxxxxxx xx | xxxxxxxxxxxx | 10.50% | |

xxxx of xxxxxx | |||

xxxxxxxxxxxx | xxxxx | ||

WACC xx be xxxx as required xxxx of xxxxxx | |||

xxxx | xxxxxx | xxxxxx | 0.0315 |

xxxxxxx | xxxxxxx | 15.5% | 0.10857 |

xxxxxxx | 14.0% |

# xxxxxx

x# Sheet3

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Debt and xxxxxx Financing

xxxx of Debt xxx Equity

Prepared xx xxxxxx Raza

1

Cost xx Debt

xxxxxxx xx xxxx Financing Debt: xxxxx Industries borrows $600,000 for 10 years with xx xxxxxx xxxxxxx of xxxxxxxxx xxxx xx the expected xxxxxxxx rate (cost of xxxxxx

Prepared xx Kumail xxxx

x

xxx an xxxxxxxxxx to xx xxxxxxxxxxx xxx expected return on xxxxxxx must be greater xxxx the xxxx xx xxxxxxxx xxx xxxx xx capital xx xxx xxxx of xxxxxx that xxxxxxx could be expected to earn in xx alternative xxxxxxxxxx xx equivalent risk. If a project xx of similar xxxx to a company's xxxxxxx business activities xx is xxxxxxxxxx to use the xxxxxxxxx average xxxx xx xxxxxxx as x xxxxx xxx xxx xxxxxxxxxxx x xxxxxxxxx securities typically xxxxxxx both debt and xxxxxxx xxx xxxx xxxxxxxxx xxxxxxxxx both the cost xx xxxx and the cost xx xxxxxx to determine a company's cost xx xxxxxxxx xxxxxxxx a rate of xxxxxx xxxxxx xxxx xxx cost of xxxxxxx is xxxxxxx required.

2

Cost xx Debt

xxxxxxxxxxxxxxxxxxxx

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## Cost_of_equity

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xxxxxxxxxxxxxx

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Cost of xxxxxxxx

Cost xx xxxxxx is xxxxxxx as the return xxxxx xxxxxxxxxxxx xxxxxxx on their investments. xx xx xxx xxxxxxxx xxxx xx xxxxxx xxx the xxxxxxxxxxx but xx xx cost for xxx xxxxxxxx Cost xx xxxxxx xxx be xxxxxxxxxx in two xxxxx xxxxxxxx xxxxxxxxx xxxxx xxx Capital Asset xxxxxxx models are the xxxx through which cost of xxxxxx xx xxxxxxxxxxx

xxxxxxxx for xxx xxxx xxx models xxx given xxxxxxx

CAPM Model:-

xxx = xxxxxxxxxxxx

xx x xxxxxx return

Rf= Risk free xxxxxx

Reference:

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

xxxxxxxx Valuation Model:-

k.e x xxxxxxxx per share/Current Market value xx stock x xxxxxx xxxx xx dividends.

Cost xx xxxxxx

Debts xxx xxx borrowing xxxxx company xxxxx to finance the xxxxxxx xxxxxxxxx xxxx xxxx to xxx interest on xxxxx borrowing. xx xxx cost of xxxx is xxxx interest which xxxxxxx xxx xx xxx on xxx xxxxxxxxxx xxx xxxxxxxx xx xx xxxxx after xxx as it xx the tax deductible xxxxxxxx

xxxxxxxxxx

xxxx

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# xxxxxx

xxxxxxxxxxxCost of Debt | |||

PVIF | x | ||

Interest rate | x xx PVIF xxxxxxx | ||

xxxxxxxxxxxxx | |||

The x xx PVIF formula xx | xxxxxxxxxxxx | xxxxxx | |

xxxx xx Equity | |||

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

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

Debt | 600000 | xxxxxx | xxxxxx |

Equitgy | xxxxxxx | xxxxx | xxxxxxx |

xxxxxxx | 14.0% |

# Sheet2

x# xxxxxx

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xxxx of xxxx

xxxx of xxxx = xxxxxxxx Payments

xxxxxxxxxx

Debts are xxx xxxxxxxxx xxxxx company xxxxx xx xxxxxxx xxx company therefore they have to xxx interest on those xxxxxxxxxx xx xxx xxxx of debt xx that xxxxxxxx xxxxx company xxx to xxx on xxx xxxxxxxxxx and normally it is xxxxx after tax as it is xxx xxx deductible expense.

Calculations

xxxx xx Debt

PVIF

6

xxxxxxxx rate

x xx xxxx xxxxxxx

xxxxxxxxxxxxx

The x in PVIF formula xx

6.014773

10.50%

xxxx xx xxxxxxxxxxxxx

xxxx of equity x xxxxxxxxxxxxx

Cost xx xxxxxxxxxxxxxxxx Valuation Model)

xxxx of Equity x xxxxxxxx per xxxxxxxxxxxxx Market xxxxx of xxxxx x xxxxxx xxxx of xxxxxxxxxx

Definition

xxxx of xxxxxx is xxxxxxx xx the xxxxxx which xxxxxxxxxxxx require on xxxxx investments. It is xxx xxxxxxxx rate of xxxxxx xxx the xxxxxxxxxxx but it xx cost for the xxxxxxxx xxxx xx equity xxx xx calculated in two xxxxx xxxxxxxx valuation xxxxx xxx xxxxxxx Asset Pricing xxxxxx are the xxxx xxxxxxx xxxxx xxxx xx equity xx xxxxxxxxxxx

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xxxx of Debt

Cost xx xxxx x xxxxxxxx Payments

xxxxxxxxxx

Debts are the borrowing xxxxx company takes to xxxxxxx the xxxxxxx xxxxxxxxx xxxx xxxx to xxx interest on those borrowing. xx xxx xxxx xx xxxx xx that interest which xxxxxxx has xx xxx xx xxx xxxxxxxxxx and xxxxxxxx xx xx taken xxxxx tax xx it xx the xxx xxxxxxxxxx expense.

Calculations

Cost of xxxx

xxxx

6

Interest xxxx

x xx PVIF xxxxxxx

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

The x xx PVIF xxxxxxx xx

6.014773

10.50%

xxxx xx xxxxxxxxxxxxx

xxxx xx equity x xxxxxxxxxxxxx

xxxx of xxxxxxxxxxxxxxxx xxxxxxxxx xxxxxx

xxxx xx xxxxxx = xxxxxxxx per xxxxxxxxxxxxx Market value of xxxxx x xxxxxx xxxx of xxxxxxxxxx

xxxxxxxxxx

xxxx of equity is xxxxxxx as the xxxxxx which stockholders require xx their xxxxxxxxxxxx xx xx xxx xxxxxxxx rate of return xxx xxx xxxxxxxxxxx but it is xxxx xxx the company. Cost of xxxxxx xxx be calculated in two ways. Dividend xxxxxxxxx model and xxxxxxx xxxxx Pricing models xxx xxx xxxx xxxxxxx which cost xx equity xx xxxxxxxxxxx

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# Sheet1

xxxxxxxxxxxxxCost of xxxx | |||

PVIF | x | ||

xxxxxxxx rate | x xx xxxx formula | ||

xxxxxxxxxxxxx | |||

xxx x xx PVIF formula is | xxxxxxxxxxxx | 10.50% | |

xxxx xx xxxxxx | |||

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

xxxx to be xxxx as required xxxx of xxxxxx | |||

Debt | xxxxxx | xxxxxx | 0.0315 |

Equitgy | xxxxxxx | xxxxx | xxxxxxx |

xxxxxxx | 14.0% |

# xxxxxx

# xxxxxx

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xxx Cost of xxxxxxx

Sensible xxxxxxxxxx

Types of Long-term xxxxxxx xxxx xxxxx xxx

xxx xxxxxxxxx decision

The firm needs capital xx xxxxxx xx the xxxxxxx They are xx xxx types: xxxxxxx assets xxx the xxxxx xxxxxxx Current xxxxxx xxx used xx xx year xxx xxxxx assets xxxxxxx xxxxx machinery, buildings xxxx remain xxx xxxx term with xxx company. xxx xxxxxxx xxx xx xxxxx the financing with xxx investment decisions. The xxxxxxx assets xxxxxx be financed from current liabilities & fixed assets should be financed xxxx xxx long term xxxxxxxxxxxxxx xxx xxxxxxx two xxxxxxxxxx xx xxxx xxxx xxxxxxxx Debt and equity. Debt xx xxxx is borrowed xxxx banks and has to be xxxxxxxx xxxxx with xxxxxxxxxxxxxxx xx the xxxxxxxxxx by the shareholders that remains for xxxx term and xxxx xxx xxxxxxxx by xxxxxxxx .

x

xxx xxxxxxxxxx xxx rate of xxxxxx on a security is x benefit of investing. For xxxxxxxxx xxxxxxxxx xxx xxxx xxxx xx return xx x cost xx xxxxxxx xxxxx xxxx xxx needed to xxxxxxx xxx xxxxxxxxx

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