- This topic has 471 replies, 96 voices, and was last updated 8 years, 1 month ago by
jeff.
-
CreatorTopic
-
March 9, 2017 at 12:47 pm #1509592
-
AuthorReplies
-
April 12, 2017 at 3:10 pm #1532565
Tncincy
ParticipantIt's been a slow day at work today (will probably pick up this evening), but logged into MCQ's, working weakest to strong, until 70%. Seems like forever, but I am getting there and understanding more. I am determined to make it work. No more quitting, I will pass…..(self talk) 🙂
It begins with a 75
Been here too long as a cheerleader....ready to passApril 12, 2017 at 7:38 pm #1532683JJ2992
Participant@tnciny that sounds like a good plan…it's tough working full time and studying. I try to study at work as much as I can as well.
How many of you guys are working full time and studying?
April 12, 2017 at 8:13 pm #1532692nkwhitaker
ParticipantCan someone please explain to me why the underpricing and flotation costs are not subtracted for the common stock calculation?
Williams, Inc., is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the company can sell unlimited amounts of all instruments.
Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8%.
Williams can sell 8% preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share.
Williams' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by $3 per share, and flotation costs are expected to amount to $5 per share.
Williams expects to have available $100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
Williams' preferred capital structure is long-term debt, 30%; preferred stock, 20%; and common stock, 50%.
The firm's weighted average cost of capital would be:Answer:
The weighted cost of capital is 6.6%.Step 1: Calculate the after-tax cost of each source of capital.
The cost of long-term debt, after tax, is given at 4.8%.
The cost of new preferred stock can be calculated as:
kpm = D / (PO – u – f), or kpm = 8.40 / (105 – 0 – 5) = 8.4%
Where:
D = Annual dividend, or 0.08 × $105 (the par value), or $8.4
PO = Selling price to the public of the new issue
u = Underpricing
f = Flotation cost per share
New equity consists of retained earnings and/or new issues of common stock. In this case, 50% of the 200,000 of total new funds must come from equity. Since the firm has $100,000 in retained earnings, the relevant cost of new equity is the cost of retained earnings, 7 ÷ 100 + 0%, or 7.0%.
Step 2: Calculate the Weighted Average Cost of Capital:Source After-Tax Cost x Weight =
—— ————– ——
a. L-T Debt .048 x .30 = .0144
b. Pref. Stock .084 x .20 = .0168
c. Ret. Earnings .070 x .50 = .0350
—–
Weighted Average Cost of Capital = .066 or 6.6%April 12, 2017 at 8:57 pm #1532697Anonymous
InactiveNYSB22 I am working full time and have a toddler. It's been fun in my household… Not! I study during my lunch hour and when my toddler goes to bed. Living off of 4 hours a sleep each day! I hope it pays off!
April 12, 2017 at 9:07 pm #1532709Paul
ParticipantDoes anyone have any advice for studying problems like question 894 from BEC MCQ? The topic is budget and Analysis. Any good videos on youtube or other resources to facilitate learning. I don't understand why February is considered to be 2 months after April..?.. Thanks you!
BEC 10/29/16
FAR 11/26/16
REG TBA
AUD TBAApril 12, 2017 at 11:11 pm #1532742Anonymous
InactiveApril 13, 2017 at 12:12 am #1532763Anonymous
InactiveCPA2017, can I ask how you did on the Becker Mock Exam 1 and 2? It sounds like you came out of the testing center confident.
April 13, 2017 at 12:45 am #1532784Jacob Carter
ParticipantWith answers and detailed Explanation.
April 13, 2017 at 5:44 am #1532800Joe
Participant@Norize Whitaker the valuation of the common stocks for the purpose of calculating WACC can be evaluated using the:
CAPM, DCF, and BYRP all of which do not have reduce the common stock by the underpricing and flotation. If you are using Becker take a look at page B2-10 for formulas on how to calculate CAPM, DCF, and BYRP. Chances are that the question will have the components to calculate one of them usually CAPM or DCF based on what I ahve seen in the past.I hope this helps.
April 13, 2017 at 1:36 pm #1532979nkwhitaker
ParticipantThanks @joeserrone!
I'm trying to figure out why for the question below the answer is 7.6%. Why is it different than the question I posted earlier? Is it because I'm not asked to calculate WACC? What am I missing?
Williams, Inc., is interested in measuring its overall cost of capital and has gathered the following data. Under the terms described as follows, the company can sell unlimited amounts of all instruments.
• Williams can raise cash by selling $1,000, 8%, 20-year bonds with annual interest payments. In selling the issue, an average premium of $30 per bond would be received, and the firm must pay flotation costs of $30 per bond. The after-tax cost of funds is estimated to be 4.8%.
• Williams can sell 8% preferred stock at par value, $105 per share. The cost of issuing and selling the preferred stock is expected to be $5 per share.
• Williams' common stock is currently selling for $100 per share. The firm expects to pay cash dividends of $7 per share next year, and the dividends are expected to remain constant. The stock will have to be underpriced by $3 per share, and flotation costs are expected to amount to $5 per share.
• Williams expects to have available $100,000 of retained earnings in the coming year; once these retained earnings are exhausted, the firm will use new common stock as the form of common stock equity financing.
• Williams' preferred capital structure is long-term debt, 30%; preferred stock, 20%; and common stock, 50%.
The cost of funds from the sale of common stock for Williams, Inc., is:
Answer: B
The cost of funds from the sale of common stock is 7.6%. According to the Gordon Dividend Capitalization Model, the market value of a share of stock is equal to the present value of future dividend streams. This formula states:
kcm = (D / (P – u – f)) + g
= (7 / (100 – 3 – 5)) + 0
= 7 / 92
= 7.6%April 13, 2017 at 2:35 pm #1533003Joe
Participant@Norize Whitaker If you are looking at Becker take a look at page B2-11 under the Discounted Cash Flow (DCF) the formula is (D1/P)+g in your case the dividend is $ 7 and the Price is $ 100 the growth is not given to you in the Common Stock line therefore 7/100 = 0.07 or 7 Percent
April 13, 2017 at 4:17 pm #1533037JJ2992
Participant@chasinCPA wow! I admire you, I could never physically do that! How many hours of studying per day are you getting in?
@CPA2017 thanks for the info!April 13, 2017 at 5:00 pm #1533052nkwhitaker
Participant@joeserrone So you do not use the Gordon Dividend Capitalization Model (kcm = (D / (P – u – f)) + g) for calculating WACC?
April 13, 2017 at 5:05 pm #1533058Joe
ParticipantNot for the purpose of WACC
April 14, 2017 at 5:12 pm #1533502Tncincy
ParticipantUghhh, I am feeling anxious again. I started writing ninja notes to try and relax. This test is really messing with my head 🙁 , one minute I'm ok then the next I start to worry about failing. I'm not quitting though. I'm on the count down til test time.
It begins with a 75
Been here too long as a cheerleader....ready to pass -
AuthorReplies
- The topic ‘BEC Study Group April May 2017 - Page 16’ is closed to new replies.