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1、Chapter10(12e)(9-11e)TheCostofCapitalMINI-CASEDuringthelastfewyears,HarryDavisIndustrieshasbeentooconstrainedbythehighcostofcapitaltomakemanycapitalinvestments.Recently,though,capitalcostshavebeendeclining,andthecompanyhasdecidedtolookseriouslyatamajorexpansionprogramthathadbeenproposedbythem
2、arketingdepartment.AssumethatyouareanassistanttoLeighJones,thefinancialvice-president.YourfirsttaskistoestimateHarryDavis’costofcapital.Joneshasprovidedyouwiththefollowingdata,whichshebelievesmayberelevanttoyourtask:1.Thefirm'staxrateis40percent.2.ThecurrentpriceofHarryDavis’12percentcoupon,s
3、emiannualpayment,noncallablebondswith15yearsremainingtomaturityis$1,153.72.HarryDavisdoesnotuseshort-terminterest-bearingdebtonapermanentbasis.Newbondswouldbeprivatelyplacedwithnoflotationcost.3.Thecurrentpriceofthefirm's10percent,$100parvalue,quarterlydividend,perpetualpreferredstockis$113.1
4、0.HarryDaviswouldincurflotationcostsof$2.00pershareonanewissue.4.HarryDavis’commonstockiscurrentlysellingat$50pershare.Itslastdividend(d0)was$4.19,anddividendsareexpectedtogrowataconstantrateof5percentintheforeseeablefuture.HarryDavis’betais1.2;theyieldont-bondsis7percent;andthemarketriskprem
5、iumisestimatedtobe6percent.Forthebond-yield-plus-risk-premiumapproach,thefirmusesa4percentagepointriskpremium.5.HarryDavis’targetcapitalstructureis30percentlong-termdebt,10percentpreferredstock,and60percentcommonequity.Tostructurethetasksomewhat,Joneshasaskedyoutoanswerthefollowingquestions.M
6、iniCase:9-9a.1.WhatsourcesofcapitalshouldbeincludedwhenyouestimateHarryDavis’weightedaveragecostofcapital(WACC)?Answer:TheWACCisusedprimarilyformakinglong-termcapitalinvestmentdecisions,i.e.,forcapitalbudgeting.Thus,theWACCshouldincludethetypesofcapitalusedtopayforlong-termassets,andthisistyp
7、icallylong-termdebt,preferredstock(ifused),andcommonstock.Short-termsourcesofcapitalconsistof(1)spontaneous,noninterest-bearingliabilitiessuchasaccountspayableandaccrualsand(2)short-terminterest-bearingdebt,suchasnotespayable.Ifthefirmusessho
