# 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**.

## Cost and Debt Equity(WORD+EXCEL+POWERPOINT) ATTACHED A+++Tutorial Use As Guide

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# Sheet1

xxxxxxxxxxxxxxxxxx of Debt | |||

xxxx | x | ||

Interest xxxx | x in xxxx formula | ||

xxxxxxxxxxxxx | |||

The x xx PVIF xxxxxxx is | 6.0147727404 | xxxxxx | |

xxxx of Equity | |||

xxxxxxxxxxxx | 15.5% | ||

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

Debt | xxxxxx | 10.50% | 0.0315 |

Equitgy | xxxxxxx | xxxxx | xxxxxxx |

xxxxxxx | 14.0% |

# xxxxxx

x# xxxxxx

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xxxx of Equity:-

Cost xx equity xx xxxxxxx xx the return which stockholders require xx their investments. xx is xxx required rate of return xxx xxx xxxxxxxxxxx but it is cost for xxx company. Cost of xxxxxx can be xxxxxxxxxx in xxx xxxxx Dividend xxxxxxxxx xxxxx xxx Capital xxxxx xxxxxxx xxxxxx xxx xxx xxxx through xxxxx cost xx equity xx calculated.

Formulas xxx xxx xxxx xxx models xxx xxxxx below:-

CAPM Model:-

xxx = xxxxxxxxxxxx

Rm x Market xxxxxx

Rf= Risk free return

Reference:

CAPM, *xxxxxxx at xxxxxxxxxxxx*x Retrieved from xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx

Dividend xxxxxxxxx xxxxxxx

xxx x xxxxxxxx xxx xxxxxxxxxxxxx Market xxxxx of xxxxx + xxxxxx rate of dividends.

Cost xx Debt:-

Debts xxx xxx xxxxxxxxx which xxxxxxx takes xx xxxxxxx the xxxxxxx xxxxxxxxx they xxxx xx pay interest xx those xxxxxxxxxx xx the xxxx xx debt is xxxx interest which company has xx xxx xx the borrowings xxx xxxxxxxx it is taken after tax xx xx is xxx tax xxxxxxxxxx expense.

xxxxxxxxxx

Cost

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xxxx xx xxxx

xxxx xx xxxx x Interest xxxxxxxx

Definition

xxxxx xxx the borrowing which xxxxxxx xxxxx xx xxxxxxx xxx xxxxxxx therefore they xxxx to pay xxxxxxxx on those xxxxxxxxxx xx the cost xx xxxx is that interest which xxxxxxx has to xxx on the xxxxxxxxxx and normally it xx taken xxxxx xxx xx it is xxx tax xxxxxxxxxx expense.

Calculations

Cost of Debt

xxxx

6

xxxxxxxx xxxx

x xx xxxx xxxxxxx

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

The x in xxxx formula xx

xxxxxxxx

10.50%

xxxx xx Equity (CAPM)

Cost of xxxxxx = xxxxxxxxxxxxx

Cost xx xxxxxxxxxxxxxxxx Valuation Model)

Cost xx Equity x Dividend xxx xxxxxxxxxxxxx xxxxxx xxxxx xx xxxxx x Growth xxxx of xxxxxxxxxx

xxxxxxxxxx

Cost of equity xx xxxxxxx xx the xxxxxx which stockholders require xx their xxxxxxxxxxxx It is xxx xxxxxxxx rate of xxxxxx for the stockholder but xx xx xxxx for the company. xxxx xx xxxxxx can be xxxxxxxxxx in xxx xxxxx xxxxxxxx valuation xxxxx xxx xxxxxxx xxxxx xxxxxxx xxxxxx xxx the ways through xxxxx cost xx xxxxxx is calculated.

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

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Your xxxxxxxxxx xx xxxxxxxxxxxxxxxx xxx xxxxxxxxxx my xxxx xxxxxxxxxxx

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xxxx of Equity:-

Cost xx equity is defined xx the xxxxxx which stockholders require on their investments. It xx the xxxxxxxx rate xx return for the xxxxxxxxxxx but xx xx cost for the company. xxxx xx equity can xx xxxxxxxxxx xx two ways. xxxxxxxx xxxxxxxxx model and xxxxxxx Asset xxxxxxx xxxxxx xxx xxx ways through xxxxx xxxx of xxxxxx is xxxxxxxxxxx

Formulas for the both the xxxxxx are given xxxxxxx

CAPM xxxxxxx

k.e = xxxxxxxxxxxx

xx = xxxxxx return

xxx Risk free xxxxxx

Reference:

xxxxx *xxxxxxx at investopedia*x Retrieved from http://www.investopedia.com/terms/c/capm.asp

Dividend xxxxxxxxx Model:-

k.e = Dividend xxx share/Current xxxxxx xxxxx of stock x xxxxxx xxxx of xxxxxxxxxx

Cost xx Debt:-

Debts are the borrowing xxxxx company takes xx xxxxxxx xxx xxxxxxx xxxxxxxxx xxxx have to xxx xxxxxxxx xx those xxxxxxxxxx So xxx xxxx xx xxxx xx that interest xxxxx xxxxxxx has to pay on xxx xxxxxxxxxx xxx xxxxxxxx it xx xxxxx after tax xx xx xx the xxx deductible xxxxxxxx

Reference:

xxxx

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# Sheet1

xxxxxxxxxxxxxxxxxxxx xx xxxx | |||

xxxx | 6 | ||

Interest xxxx | x in PVIF xxxxxxx | ||

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

The x in PVIF formula is | xxxxxxxxxxxx | 10.50% | |

Cost xx Equity | |||

xxxxxxxxxxxx | xxxxx | ||

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

Debt | 600000 | xxxxxx | 0.0315 |

xxxxxxx | xxxxxxx | 15.5% | xxxxxxx |

xxxxxxx | 14.0% |

# xxxxxx

x# xxxxxx

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xxxx xx Debt

xxxx xx debt x Interest Payments

Definition

xxxxx xxx the borrowing xxxxx xxxxxxx xxxxx xx finance xxx company therefore xxxx xxxx to xxx interest on xxxxx xxxxxxxxxx xx the xxxx xx debt xx xxxx xxxxxxxx xxxxx company has to xxx on the borrowings and normally it is taken xxxxx xxx as it xx the xxx deductible xxxxxxxxx

xxxxxxxxxxxx

xxxx of Debt

PVIF

6

xxxxxxxx rate

x xx PVIF xxxxxxx

xxxxxxxxxxxxx

The x in xxxx formula xx

xxxxxxxx

10.50%

Cost of xxxxxxxxxxxxx

Cost xx xxxxxx x (Rm-Rf)*Beta

Cost xx xxxxxxxxxxxxxxxx xxxxxxxxx xxxxxx

Cost of Equity = xxxxxxxx xxx xxxxxxxxxxxxx Market value xx stock + Growth xxxx xx xxxxxxxxxx

xxxxxxxxxx

xxxx xx xxxxxx xx defined xx xxx xxxxxx xxxxx xxxxxxxxxxxx xxxxxxx xx their investments. It xx xxx required rate xx return for xxx stockholder but it is cost xxx xxx xxxxxxxx xxxx xx xxxxxx xxx be calculated in two ways. xxxxxxxx xxxxxxxxx xxxxx and Capital Asset xxxxxxx models are xxx xxxx xxxxxxx xxxxx xxxx xx equity xx xxxxxxxxxxx

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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 xx Debt

Cost xx debt = xxxxxxxx xxxxxxxx

Definition

xxxxx xxx xxx xxxxxxxxx xxxxx xxxxxxx xxxxx xx xxxxxxx xxx company therefore they xxxx xx xxx interest on those borrowing. So xxx cost of debt xx that interest which company xxx to pay on the xxxxxxxxxx xxx normally it xx xxxxx after tax xx it xx xxx xxx xxxxxxxxxx expense.

xxxxxxxxxxxx

Cost xx Debt

xxxx

x

xxxxxxxx rate

x in PVIF xxxxxxx

xxxxxxxxxxxxx

xxx x in PVIF xxxxxxx is

6.014773

xxxxxx

xxxx xx xxxxxxxxxxxxx

xxxx xx xxxxxx x (Rm-Rf)*Beta

xxxx of Equity (Dividend xxxxxxxxx Model)

Cost of xxxxxx = Dividend per xxxxxxxxxxxxx xxxxxx xxxxx of stock + Growth xxxx xx xxxxxxxxxx

Definition

Cost of xxxxxx is defined xx xxx return which stockholders require on xxxxx investments. xx is the required xxxx of xxxxxx xxx the xxxxxxxxxxx but it is xxxx for xxx xxxxxxxx xxxx of xxxxxx xxx xx calculated in xxx xxxxx xxxxxxxx valuation model xxx Capital xxxxx Pricing xxxxxx xxx xxx ways xxxxxxx xxxxx cost of xxxxxx xx xxxxxxxxxxx

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# Sheet1

xxxxxxxxxxxxxxxxxx xx xxxx | |||

PVIF | x | ||

Interest xxxx | x xx PVIF formula | ||

xxxxxxxxxxxxx | |||

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

xxxx of Equity | |||

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

WACC to be xxxx as required rate of return | |||

Debt | 600000 | xxxxxx | xxxxxx |

Equitgy | xxxxxxx | 15.5% | 0.10857 |

2000000 | 14.0% |

# xxxxxx

# xxxxxx

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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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## B6022 Module 4 Assignment 2 Cost of Debt and Equity

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xxxxx xxxxxx 4 Assignment 2 Cost of Debt and Equity

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xxxx xx xxxx xxx xxxxxx

Name Financial xxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxxx x Assignment xx

Agenda

Jones WACC Cost xx Debt Cost of xxxxxxxxxxx of New xxxxxx

Jones Weighted xxxxxxx cost of xxxxxxx

xxxx xx Debt

Cost xx xxxxxx

xxxx xx xxxxxx xxxxxxxxxxx

xxxx of New Equity

Cost xx xxx xxxxxx xxxxxxxxxxxx

Summary

xxxxxxxxx to the WACC, Jones Industries can xxxxxx xxxxx debts Since xxx beta is xxxxxxx than xx xxxxx Industries xxx slightly xxxxxx xxxx xxx xxxxxxxxxxxxxx will be xxxx xx generate at xx xxxxxxxxxx rate

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