Project #42327 - Financial management

  Task Type: Discussion Board   Deliverable Length: See assignment details   
Points Possible: 50   Due Date: 11/2/2014 11:59:59 PM  CT   

The discussion assignment for this week includes a review of the Key Assignment Outline completed by one of your classmates, as well as a substantial response to at least 1 other student. There will also be a normal Discussion Board on the topics being learned in this Phase.

Primary Discussion Response is due by Wednesday (11:59:59pm Central), Peer Responses are due by Sunday (11:59:59pm Central).

Part 1

Primary Task Response: Your first task is to post your own Key Assignment Outline to the discussion area so that other students are able to review your plan. Attach your document to the main discussion post, and include any notes that you feel are appropriate. The purpose of this assignment is to help improve the quality of the Key Assignment Draft that you will complete next week.

Respond to Another Student: Review at least 1 other student's Key Assignment Outline, and provide meaningful feedback. Refrain from general feedback, such as simply stating "good job." Your feedback to other students is most helpful if you not only point out weak areas but also offer suggestions for improvement. The best feedback takes a three-stage approach to identify what was done well, weaknesses, and areas for improvement.

Part 2

Primary Task Response: Within the Discussion Board area, write 400–600 words that respond to the following questions with your thoughts, ideas, and comments. This will be the foundation for future discussions by your classmates. Be substantive and clear, and use examples to reinforce your ideas.

In this Phase, you will be learning about the concept of the cost of capital, how it is calculated, and why it is essential to be used properly. This concept, along with the time value of money concept, will be employed in addressing the Phase 5 tasks and is related to the tasks that you completed in Phase 1 and 3.

Identify and recommend at least 1 credible Web site that discusses the process of calculating the cost of capital and it components, and address at least 3 of the following topics:

  • What is the cost of capital, and what role does it play in long-term investment decisions?
  • What are the 3 basic components of the formula, and how is each estimated?
  • Why is the after-tax cost of debt used, and how does this adjustment affect the overall cost of capital?
  • Which component is generally the most expensive, and why?
  • How is the cost of capital calculated, and how are the weights of each component determined?
  • Why is the cost of retained earnings less costly than issuing new equity?
  • What is the difference between the weighted average cost of capital (WACC) and the weighted marginal cost of capital (WMCC), and when should the WMCC be used?

Be sure to document your posts with in-text citations, credible sources, and properly listed references.

Task Type: Individual Project   Deliverable Length: Word document of 700–1,000 words with attached Excel Spreadsheet showing calculations   
Points Possible: 150   Due Date: 11/3/2014 11:59:59 PM  CT   

Weekly tasks or assignments (Individual or Group Projects) will be due by Monday, and late submissions will be assigned a late penalty in accordance with the late penalty policy found in the syllabus. NOTE: All submission posting times are based on midnight Central Time.

Key Assignment Draft

Your next assignment as a financial management intern is to apply the knowledge that you acquired while engaging in the cost of capital discussion that you had with your colleagues. In this task, you will be calculating the weighted cost of capital for a firm using the book value of the components and the concepts presented in this phase.

Using the most current annual financial statements from the company you analyzed in Phase 1, determine the percentage of the firm's assets that are currently be financed with debt (total liabilities), preferred stock, and common stock (common equity). It is very possible that your firm will have very little or no preferred stock, so in this class, the percent would be "zero." Your ratios should add up to 100%. You will also need to calculate the firm’s average tax rate using the income tax expense divided by the firm's income before taxes. Use the following tables:



Total Assets

Total Liabilities

Total Preferred Stock

Total Common Equity

Dollar Value


% of Assets




Income before Tax

Income Tax Expense

Average Tax Rate (%)


The first component to determine is the cost of debt. You mentor suggests using the Web site that you used in the previous Phase to find the pretax yield-to-maturity of a bond with at least 5 years left before maturity. Using the following table, calculate the firm's after-tax cost of debt:


Yield to Maturity

1 - Average Tax Rate

After-tax Cost of Debt


Now you will need to calculate the cost of preferred stock. You can use the following table:


Annual Dividend

Current Value of Preferred Stock

Cost of Preferred Stock (%)


To calculate the cost of common equity, you can use the CAPM model. Using current stock data, the yield on the 5-year treasury bond, and the return on the market calculated in Phase 2, you can calculate the cost of common equity using the following table:


5-year Treasury Bond Yield
(risk-free rate)

Stock's Beta

Return on the Top 500 Stocks (market return)

Cost of Common Equity


Now, you can use the cost and ratios from above to calculate the firm's weighted average cost of capital (WACC) using the following table:



After-Tax Cost of Debt

Cost of Preferred Stock

Cost of Common Equity


Unweighted Cost


Weight of Component


Weighted Cost of Component

  • After completing the required calculations, explain your results in a Word document, and attach the spreadsheet showing your work. Be sure to explain the following:
    • How would you expect the weighted average cost of capital (WACC) to differ if you had used market values of equity rather than the book value of equity, and why?
    • What would you expect would happen to the cost of equity if you had to raise it by selling new equity, and why?
    • If the after-tax cost of debt is always less expensive than equity, why don't firms use more debt and less equity?
    • What are some of the advantages and disadvantages of raising capital by using debt?
    • How would "floatation costs" impacted the WACC, and how could they have been incorporated in the formula?

Note: You can find information about the top 500 stocks at this Web site.


S&P 500 index chart. (2014). Retrieved from the Yahoo! Finance Web site:^gspc;range=1y;compare=;indicator=volume;charttype=area;crosshair=on;ohlcvalues=0;logscale=off;source=;

Be sure to document your paper with in-text citations, credible sources, and list of references used in proper APA format

Subject Business
Due By (Pacific Time) 11/01/2014 12:00 am
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