# Need help with worksheet

## Sheet1

7 CP Weighted Average Cost of Capital (WACC)

(pre tax)

\$ 1,200

\$ 200

\$ 1,000

Interest Expense \$ 200

Mail the dividend \$

\$ 1,000

\$ 320 \$ 400

 Unit Five Steps My work shows Debt at 7.5% and Tax Rate at 40%, the assignment numbers are different Bankers and Investors – expect to be paid : Portion of Capital Attained (Weight) Stated Cost of Capital or Debt Step 3 After-tax Cost Apply Weights to Cost of Capital Bankers Interest Expense 0.360 0.075 Step 4 Preferred Stock Dividend – Yield 0.140 0.070 0.0700 Step 1 (Retained Earnings)Common~ Dividend – Yield 0.500 0.118 0.1180 Step 2 100% Step 5 STEP 3 I Borrow I sell Stock Income \$ 1,200 Operating Expenses \$ 200 Operating Income \$ 1,000 \$ – 0 Taxable Income \$ 800 Apply a 40 % Tax Expense \$ 320 \$ 400 Mail your check to the IRS Cash Out Step 3: Calculate the TRUE After tax cost of debt, Stated Cost x (1 – tax rate) of Step 3: I saved \$80 in taxes because I borrowed and paid interest expense .075(1-.40) After Tax Cost 4.5% The true debt expense is smaller because it made your taxable income lower Step 3 will be a separate slide

There is a second part to the problem —
You are a consultant to Pillbriar Company. Pillbriar’s target capital structure is 36% debt, 14% preferred, and 50% common equity. The interest rate on new debt is 7.5%, the yield on the preferred is 7.00%, the common stock ( we say Common Stock) is 11.75%, and the tax rate is 40%. What is Pillbriar’s WACC?
What are three methods for estimating the cost of common stock from retained earnings? Which of these methods provides the most accurate and reliable estimate?