Glen has a B.S. in accounting from CWU (2007) and passed the CPA exam (2008). He

Question

Glen has a B.S. in accounting from CWU (2007) and passed the CPA exam (2008). He has been in public accounting for 2 years. During that time he earned an MBA from Seattle U. He would like to be the CFO of a company someday--maybe Slamdunk Sporting Goods-- and this is an opportunity to get onto that career track and to prove his ability.

As Glen looks over the financial data collected, he is trying to make sense of it all. He already has the most difficult part of the analysis complete -- the estimation of cash flows. Through some internet research and application of finance theory, he has also determined the firm

Explanation / Answer

Calculation of cost of preferred stock 1 Cost of preferred stock = Dividend / Price = 100*10.5% /114 9.21% 2 Calculation of estimated cost of common equity using the CAPM approach Cost of Equity = Risk free rate + Beta* (Marker rate - Risk free rate ) = 2.8% + 0.96*(12.5%-2.8%) 12.11% 3 Calculation of estimated cost of common equity using the DCF approach Cost of equity = (Expected Dividend / Price )+ Growth rate Growth rate = 5.8% =0.058 Expected Dividend =Last Dividend *(1+ Growth rate) =3.95*(1+0.058) 4.1791 Cost of equity = (4.1791 / 66.80 )+ 0.058 12.06% 4 Calculation of estimated cost of common equity using the bond-yield-plus-risk-premium approach Bond Yeild = 8% Risk Premium = 2.8% Cost of equity = 8 +2.8 = 10.8%

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