Reference no: EM132471341

Question a. 1. What sources of capital should be included when you estimate Jana's weighted average cost of capital?

Question 2. Should the component costs be figured on a before-tax or an after-tax basis?

Question 3. Should the costs be historical (embedded) costs or new (marginal) costs?

Question b. What is the market interest rate on Jana's debt, and what is the component cost of this debt for WACC purposes?

Question c. 1. What is the firm's cost of preferred stock?

Question 2. Jana's preferred stock is riskier to investors than its debt, yet the preferred stock's yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake? (Hint: Think about taxes.)

Question d. 1. What are the two primary ways companies raise common equity?

Question 2. Why is there a cost associated with reinvested earnings?

Question 3. Jana doesn't plan to issue new shares of common stock. Using the CAPM approach, what is Jana's estimated cost of equity?

Question e. 1. What is the estimated cost of equity using the dividend growth approach?

Question 2. Suppose the firm has historically earned 15% on equity (ROE) and has paid out 62% of earnings, and suppose investors expect similar values to obtain in the future. How could you use this information to estimate the future dividend growth rate, and what growth rate would you get? Is this consistent with the 5.8% growth rate given earlier?

Question 3. Could the dividend growth approach be applied if the growth rate were not constant? How?

Question f. What is the cost of equity based on the own-bond-yield-plus-judgmental-risk-premium method?

Question g. What is your final estimate for the cost of equity, ?

Question h. What is Jana's weighted average cost of capital (WACC)?

Question i. What factors influence a company's WACC?

Question j. Should the company use its overall WACC as the hurdle rate for each of its divisions?

Attachment:- weight average cost.rar