During the last few years, Harry Davis Industries has been
too constrained by the high cost of capital to make many capital investments.
Recently, though, capital costs have been declining, and the company has
decided to look seriously at a major expansion program proposed by the
marketing department. Mary Simpson who is an assistant to Leigh Jones, the
financial vice president is asked to estimate Harry Davis’s cost of capital.
Jones provides Simpson with the following data.
firm’s tax rate is 40%.
firm has 10% annual coupon bonds with 15 years remaining to maturity. The
current price of the bond is $1, 096.26. The bond’s yield-to-maturity is 8.82%.
firm’s balance sheet shows $100 million long-term debt and $300 million common
Simpson estimates the market risk premium as the historical
average return on stocks minus the current return on Treasury bonds and obtains
a 15.4% of the cost of common stock based on the CAPM.
Simpson calculates the firm’s weighted average cost of
capital (WACC) as follows:
Weight of long-term debt is .25
Weight of common equity is .75
WACC = .25 x 10% x (1 – .4) +
.75 x 15.4% = 13.05%
problems inherent in Simpson’s WACC calculation.
can you suggest to solve problems found in Question 1?
used the CAPM to estimate the cost of common stock. What can you propose to get
the best estimate for the cost of common stock?
confident can you be with the WACC based on solutions you suggested through the
evaluative process in terms of the firm’s divisions and projects? What issues
should be considered?
Why Choose Us
- 100% non-plagiarized Papers
- 24/7 /365 Service Available
- Affordable Prices
- Any Paper, Urgency, and Subject
- Will complete your papers in 6 hours
- On-time Delivery
- Money-back and Privacy guarantees
- Unlimited Amendments upon request
- Satisfaction guarantee
How it Works
- Click on the “Place Order” tab at the top menu or “Order Now” icon at the bottom and a new page will appear with an order form to be filled.
- Fill in your paper’s requirements in the "PAPER DETAILS" section.
- Fill in your paper’s academic level, deadline, and the required number of pages from the drop-down menus.
- Click “CREATE ACCOUNT & SIGN IN” to enter your registration details and get an account with us for record-keeping and then, click on “PROCEED TO CHECKOUT” at the bottom of the page.
- From there, the payment sections will show, follow the guided payment process and your order will be available for our writing team to work on it.