West Coast Semiconductor Case Study. Please answer all questions in detail, and show formulas. I must present on this case this week, so explanations are helpful for me to learn and understand.
1. The company uses the earnings yield as a measure of the firm's cost of equity. Is this acceptable?
2. What should the firm do with floatation costs on the debt? What is commonly accepted? Why?
3. Their current debt matures in 20 years. Is it acceptable to use the cost of a 20 year debt instrument to estimate the cost of a 30 year debt instrument? Under what conditions are they the same?
4. In calculating the cost of equity under the CAPM, what risk free rate should be used? T-Bill? T-Bond? If T-Bond, then which one? Which one does the finance literature support? Which one does your group favor?
5. There is more than one way to estimate growth (i.e., "g" in the constant growth model.) What ways can you come up with?
6. There is more than one way to calculate the cost of equity capital. What are they? Which is favored in the literature?
7. A firm might be able to issue $200 million in new debt at one price, but if they issued more, the price may go up. This affects what is known as the MCC (marginal cost of capital). This problem talks about the MCC, but it does not say anything about debt prices changing. What do we need to know MCC for?
There are few other things I could ask about, but I want you to identify them. (Hint: you have calculations necessary to do this case. It is not all writing.) It is not necessary for you to write down the question and then the answer, but it would be a good idea, in the course of either writing up the case or presenting the case, that these so called questions got answered.