(See related pages)
|
|
|
| 12.1 Cost of Equity. Go to finance.yahoo.com and look up the information for Washington Mutual (WM), a financial services company in the S&P 500. You want to estimate the cost of equity for the company. First, find the current Treasury bill rate. Next, find the beta for Washington Mutual. Using the historical market risk premium, what is the estimated cost of equity for Washington Mutual using the CAPM? Now find the analyst's growth rate estimates for the next five years for the company. Using this growth rate in the dividend discount model, what is the estimated cost of equity? Now find the dividends paid by the company over the past five years and calculate the arithmetic and geometric growth rate in dividends. Using these growth rates, what is the estimated cost of equity? Looking at these four estimates, what cost of equity would you use for the company?
12.2 Cost of Debt. Go to www.nasdbondinfo.com and look up the outstanding bonds for Nike. Record the most recent price and YTM of each bond issue. Now go to www.sec.gov and find the most recent 10Q or 10K report filed by the company and find the book value of each bond issue. Assuming Nike's tax rate is 38 percent, what is the cost of debt using book value weights? What is the cost of debt using market value weights? Which of these numbers is more relevant? |