FIN307 | Finance in Business - Grantham University
- Could the dividend growth approach be applied if the growth rate were not constant? How?
f. What is the cost of equity based on the own-bond-yield-plus-judgmental-risk-premium method? g. What is your final estimate for the cost of equity, ? h. What is Jana’s weighted average cost of capital (WACC)? i. What factors influence a company’s WACC? j. Should the company use its overall WACC as the hurdle rate for each of its divisions? k. What procedures can be used to estimate the risk-adjusted cost of capital for a particular division? What approaches are used to measure a division’s beta? l. Jana is interested in establishing a new division that will focus primarily on developing new Internet-based projects. In trying to determine the cost of capital for this new division, you discover that specialized firms involved in similar projects have, on average, the following characteristics: Their capital structure is 10% debt and 90% common equity; their cost of debt is typically 12%; and they have a beta of 1.7. Given this information, what would your estimate be for the new division’s cost of capital? m. What are three types of project risk? How can each type of risk be considered when thinking about the new division’s cost of capital? n. Explain in words why new common stock that is raised externally has a higher percentage cost than equity that is raised internally by retaining earnings. o. 1. Jana estimates that if it issues new common stock, the flotation cost will be 15%. Jana incorporates the flotation costs into the dividend growth approach. What is the estimated cost of newly issued common stock, taking into account the flotation cost?