(1) Estimate Capital Structure (25 points)
- Estimate the firm?s weights of debt, preferred stock, and common stock using the firm?s balance sheet (book
value). - Estimate the firm?s weights of debt, preferred stock, and common stock using the market value of each
capital component.
(2) Compute Weighted Average Cost of Capital (WACC) (35 points) - Estimate the firm?s before-tax and after-tax component cost of debt; (Note: If the information about the
current corporate tax rate is not available, you need to estimate the tax rate based on the historical tax
payments). - Estimate the firm?s component cost of preferred stock if the firm has issued preferred stocks.
- Use three approaches (CAPM, DCF, bond-yield-plus-risk-premium) to estimate the component cost of
common equity for the firm. - Calculate the firm?s weighted average cost of capital (WACC) using the market-based capital structure
weights.