Case 04be

This case illustrates the cost of capital estimation process. It |

demonstrates (1) the mechanics of determining the component costs of |

capital--specifically debt, preferred stock, and common equity, (2) the |

effects of changes in the the target capital structure on the WACC, (3) |

the effects of callable bonds on the cost of debt, (4) and when to use |

YTC vs. YTM as the component cost of debt. | | |

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Investment opportunities are also evaluated, and the marginal cost of |

capital (MCC) schedule is combined with an investment opportunity | |

schedule (IOS) to illustrate the role of the cost of capital in the |

capital budgeting process. To view a graph of the MCC and IOS | |

Schedules, click on the 'MCC-IOS' tab at the bottom of the workbook. |

To return to the model, click on the tab labelled 'CASE04B.' | |

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The model is long, because it does a lot of little calculations, | |

and also because we copied values to use the IRR functions to find |

bond yields. Because of its length, it may take a while to operate the |

model, and it would be easy to mess it up. It would be easier to not |

use the model unless you plan to do sensitivity analysis. | |

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If you are using the student version of the model, the following cells |

have been blanked out: C68, C74, C90, B140, C112, F161, F166, E172, |

and E178. Before using the model, it is necessary to fill in the empty |

cells with the appropriate formulas. Once this is done, the model is |

ready for use. | | | | | |