Cost Of Capital

a. (1.) What sources of capital should be included when you estimate Harry Davis' weighted average cost of capital (WACC)?

The WACC should include the types of capital that are used to long-termdebt, preferred stock and common Stock. But if the company uses short term bearing assets to acquire fixed assets, we should include a short-term debt component.

a.1 Should the component costs befigured on a before-tax or an after-tax basis?

We should do all the cash flows and rate of returns calculations with an after tax basis, because the dividends and reinvestment are paid withafter-tax basis.

a.2 Should the costs be historical (embedded) costs or new (marginal) costs?

Cause the cost of capital it´s mostly used to make decisions about raising new capital for the company, weused marginal costs.

b. What is the market interest rate on Harry Davis' debt and its component cost of debt?

The Harry Davis´ market interest rate debt is 10%
It´s component cost of debtis 10%(1-.40)=6%

c. (1.) What is the firm's cost of preferred stock?

Rps= (.1*$100)/(116.95*(1-.05)= 9%

(2.) Harry Davis' preferred stock is riskier to investors than its debt, yet thepreferred's yield to investors is lower than the yield to maturity on the debt. Does this suggest that you have made a mistake? (Hint: Think about taxes.)

The after tax yield to a corporateinvestor such as the after tax cost to the issuer are higher on preferred stock than on debt

d. (1.) What are the two primary ways companies raise common equity?

A company can raise common equityby:
-Retaining earnings
-Issuing new common stock
(2.) Why is there a cost associated with reinvested earnings?

Because the reinvested earnings have an opportunity cost, because that couldhave been received by the stockholders, and then they would invested that money in other instruments.

(3.) Harry Davis doesn’t plan to issue new shares of common stock. Using the CAPM approach,...