UMGC Debt Financing, Equity Financing, Cost of Capital Worksheet

Hello,

Please answer questions 1-3 on the provided excel sheet. See below for helpful notes

You may adjust the spacing on each sheet to show your work or add additional sheets to show your work for set of questions within each problem. ALL calculations, and figures must be provided in your assignment, where applicable.

for the two Problems related to Debt Financing, you can use the PV formula (Problem 1) and the RATE formula (Problem 2 and 3).

For the Problems related to Equity Financing, you will first need to find, given the current stock price, the stocks constant growth rate. The formula is as follows:

E(g) = [(P0 * R(Rs)] – D0 / DO+PO

E(g) refers to the expected growth rate

PO refers to the current stock price

DO refers to the dividend

R(Rs) refers to the required rate of return

Now, under the constant growth assumptions, stock price increases each year at the growth rate, E(g), you can determine the stock price in 5 years.

For the exercise related to Debt Financing, the corporate cost of capital is merely the weighted average (blend) of the component costs.

Corporate Cost of Capital = [wd*R(Rd) * (1-T)] + [we * R(Re)]

wd refers to debt

R(Rd) refers to cost of debt

T value of 0

we refers to equity

R(re) refers to the cost of equity

Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
Assigned Week(s).
PROBLEM 1: Week 3 and Week 4 Debt Financing
Assume HCA sold bonds that have a ten-year maturity, a 13 percent coupon rate with
annual payments, and a $1,000 par value.
a. Suppose that two years after the bonds were issued, the required interest rate fell to 12 percent. What
would be the bond’s value?
b. Suppose that two years after the bonds were issued, the required interest rate rose to 14 percent. What
would be the bond’s value?
PROBLEM 2 : Week 3 and Week 4 Debt Financing
Tenet Healthcare, has a bond issue outstanding with eight years remaining to maturity,
a coupon rate of 9 percent with interest paid annually, and a par value of $1,000. The current market
price of the bond is $1,251.22.
a. What is the bond’s yield to maturity?
b. Now, assume that the bond has semiannual coupon payments. What is its yield to maturity in this
situation?
PROBLEM 3: Week 3 and Week 4 Debt Financing
United Health Group has bonds outstanding that have four years remaining to maturity,
a coupon interest rate of 8 percent paid annually, and a $1,000 par value.
a. What is the yield to maturity on the issue if the current market price is $829?
b. If the current market price is $1,104?
c. Would you be willing to buy one of these bonds for $829 if you required a 12 percent rate of return on
the issue? Explain your answer.
assignment.
h question in the problem.
ok to the Classroom by the Assigned Due Date for the
ell to 12 percent. What
ose to 14 percent. What
The current market
d to maturity in this
rcent rate of return on
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
the Assigned Week(s).
PROBLEM 1: Week 3 and Week 4 Equity Financing
Liberty Rehab Corporation has a current stock price of $56, and its last dividend (D0) was
$5.00. In view of the company’s strong financial position, its required rate of return is 10 percent. If Liberty’s
dividends are expected to grow at a constant rate in the future, what is the firm’s expected stock price in
five years?
Constant Growth Rate:
Expected Stock Price in 5 Years:
PROBLEM 2: Week 3 and Week 4 Equity Financing
Your personal financial advisor is trying to get you to buy the stock of Eagle Healthcare, a
local drug and alcohol rehabilitation company. The stock has a current market price of $35, its last dividend (D0) wa
and the company’s earnings and dividends are expected to increase at a constant growth rate of 8 percent. The
required return on this stock is 15 percent. From a strict valuation standpoint, should you buy the
stock?
Include the solution for deciding to buy or not buy the stock.
assignment.
h question in the problem.
ok to the Classroom by the Assigned Due Date for
is 10 percent. If Liberty’s
expected stock price in
ce of $35, its last dividend (D0) was $2.50,
growth rate of 8 percent. The
uld you buy the
Student Name:
Exercise Assignment Instructions:
• Provide answers to each problem for each weekly exercise assignment.
• Include any calculations, equations, and/or formulas for each question
• Show your work for each answer.
• Submit Your Weekly Exercise Answers for the Excel Workbook to the Classroom by the
Assigned Week(s).
PROBLEM 1: Week 3 and Week 4 Cost of Capital
St. David’s Hospital in Austin, Texas has a target capital structure of 35 percent debt and 65 percent equity. Its cost
equity (fund capital) estimate is 13.5 percent and its cost of debt is 7 percent. If it has a 35% tax rate, what
is the hospital’s corporate cost of capital?
PROBLEM 2: Week 3 and Week 4 Cost of Capital
The capital structure for HCA is provided below. If the firm has a 5% after tax cost of debt, 9% commerical loan rate
a 11.5% cost of preferred stock, an 15% cost of common stock, and given the dollar amounts provided below, what
weighted average cost of capital (WACC)?
Capital Structure (in K’s)
Bonds
$ 1,083
Commercial Loans
$ 2,845
Preferred Stock
$
268
Common Stock
$ 3,681
Weights
Individual Costs
5.00%
9.00%
11.50%
15.00%
assignment.
h question in the problem.
ok to the Classroom by the Assigned Due Date for the
ebt and 65 percent equity. Its cost of
has a 35% tax rate, what
t of debt, 9% commerical loan rate,
lar amounts provided below, what is the firm’s
Weighted Costs