SCRPC’s Balance Sheet Information ($000s)
BOOK
Accounts Payable $120,124
Accruals and Other Current Liabilities 64,111
Notes Payable (for working capital) 58,125
TOTAL CURRENT LIABILITIES 242,360
Long-term Debt 275,000
TOTAL LIABILITIES 517,360
Preferred Stock (par $100) 5,000
Common Equity ($1 par) 10,000
Excess of Par 40,000
Retained Earnings 458,445
TOTAL LIABILITIES AND EQUITY $1,030,805
Exhibit V: Market, Industry, and SCRPC’s Financial Information
Treasury Bill Rate 4.25%
Long-term Government Bond Yield 7.45%
Long-term Corporate Bond Yield 8.75%
Average Beta for Industry 1.25
SCRPC’S Beta 1.45
Average P/E Ratio for Industry 13.50
SCRPC’S Recent P/E Ratio 10.75
Recent Price of SCRPC’s Common Stock $36.01
SCRPC’s Tax Rate 40%
SCRPC’s Bond Risk Premium 4.0%
SCRPC’s Bond’s are selling at $910 with a Coupon. Rate of 7.25 and maturity of 14 years. Floatation costs for the bonds would be $5 per bond. SCRPC’s preferred stock ($100 par) pays a $14 dividend and is selling for $110. The firm would have a $5 floatation cost if it sold preferred stock today. If SCRPC sold additional common stock, the floatation cost and the decline in value would be about 20% of the current price.
Exhibit II: Historical Estimates of Yearly Returns on Certain Investments: 1926 - 2004
Investment Arithmetic Return Geometric Return Standard Deviation
Common Stocks 12.39% 10.43% 20.32
Long-term Government Bonds 5.82% 5.44% 9.30
T-Bills 3.76% 3.72% 3.14
Inflation 3.12% 3.04% 4.32
Historic Equity Premium (Gov. Bonds) 6.57% 4.99%
Historic Equity Premium (Gov. Bills) 8.63% 6.71%
Source: Ibbotson Associates, Stocks, Bonds, Bills, and Inflation, Valuation Edition, 2006 Yearbook.
Exhibit III: SCRPC’s EPS and DPS Information Year EPS Change (%) DPS (%)
2007 $1.72 $0.92
2008 $1.84 3.98 $0.96 4.34
2009 $2.85 54.89 $1.01 5.50
2010 $3.25 14.04 $1.06 4.95
2011 $3.12 -4.00 $1.10 3.77
2012 $3.15 0.96 $1.16 5.45
2013 Projected $3.35 6.35 $1.22 5.17
Question: Estimate the cost for common stock using the Gordon Model (dividend valuation model).
Question: Calculate the cost of common stock using the Capital Asset Pricing Model.
Question: Calculate SCRPC’s cost of capital when retained earnings is the source of common stock financing and the Gordon Model estimate is used. Use current market values of the financial instruments to determine the components weights.
Question: What is SCRPC’s cost of capital when the firm has to issue new common stock and the Gordon Model estimate is used?