Calculating the WACC
Skye Computer Company: Balance Sheet as of December 31
(in thousands of dollars)
2021
Current assets$2,000
Net fixed assets3,000
Total assets$0
Accounts payable and accruals$700
Short-term debt200
Long-term debt1,850
Preferred stock400
Common stock900
Retained earnings950
Total common equity$0
Total liabilities and equity$0
Last year’s earnings per share$2.60
Current price of common stock, P0$50.00
Last year’s dividend on common stock, D0$1.70
Growth rate of common dividend, g10%
Flotation cost for common stock, F11%
Common stock outstanding40,000
Current price of preferred stock, Pp$30.00
Dividend on preferred stock, Dp$2.70
Preferred stock outstanding15,000
Before-tax cost of debt, rd10%
Market risk premium, rM – rRF5%
Risk-free rate, rRF6%
Beta1.384
Tax rate25%
Total debt $2,050 thousand
a. Calculating the cost of each capital component (using the DCF method to find
the cost of common equity)
After-tax cost of debt
Cost of preferred stock
Cost of retained earnings
Cost of new common stock
b. Calculating the cost of common equity from retained earnings, using the CAPM method
Cost of retained earnings
c. Calculating the cost of new common stock based on the CAPM
Flotation cost adjustment
Cost of new common stock
d. Calculating the firm’s WACC assuming that (1) it uses only retained earnings for equity and
(2) if it expands so rapidly that it must issue new common stock