MBA 520 SNHU Importance of Cost of Capital & Meaning of Calculations Discussion 8-2 Activity: Cost of Capital Instructions To complete this assignment, r

MBA 520 SNHU Importance of Cost of Capital & Meaning of Calculations Discussion 8-2 Activity: Cost of Capital

Instructions

To complete this assignment, review the prompt and grading rubric in the Module Eight Activity Guidelines and Rubric document. Use this worksheet to complete the second part of the activity. When you have finished your work, submit the assignment here for grading and instructor feedback.

As you prepare your Module Eight – Cost of Capital assignment this week, please ensure that you complete both parts of the assignment:

There is a written assignment (to be completed in a word document) that is separate from completing the worksheet (see the Rubric Guidelines – attached) which includes:

Answer the following questions based on your organization chosen for the final project. Write your response in a separate Microsoft Word document:

Importance of Cost of Capital: Why is cost of capital important to an organization, and what does it measure?
Meaning of Calculations: How do organizations calculate various costs, and what do these calculations mean to business?

Your written response should be a 1- to 2-page Microsoft Word document, double spaced, with 12-point Times New Roman font, one-inch margins, and citations in APA 7 ed. style. You must also complete and submit the Module Eight Activity Worksheet.

To facilitate successful completion of both the written and problem solving portions of this week’s work, I have provided the attached template which integrates both portions of the assignment.

Please also take advantage of the resources included in the Reading and Resources section that includes information and videos regarding the WACC. I have included the videos below. MBA 520 Module Eight Activity Guidelines and Rubric
Overview: For this task, you will explain the importance of cost of capital to organizational success and work through some calculations to understand their
value.
Prompt: First, review the module resources, especially Chapter 11 in the textbook. Then, address the following:


Answer the following questions based on your organization chosen for the final project. Write your response in a separate Microsoft Word document:
o Importance of Cost of Capital: Why is cost of capital important to an organization, and what does it measure?
o Meaning of Calculations: How do organizations calculate various costs, and what do these calculations mean to business?
After completing the written portion, calculate answers to the problems in the worksheet.
Refer to the textbook and other course materials to support your responses.
Rubric
Guidelines for Submission: Your written response should be a 1- to 2-page Microsoft Word document, double spaced, with 12-point Times New Roman font,
one-inch margins, and citations in APA style. You must also complete and submit the Module Eight Activity Worksheet.
Critical Elements
Exemplary (100%)
Importance of Cost Meets “Proficient” criteria and
of Capital
demonstrates a nuanced
understanding of the importance
of cost of capital to an
organization and what it
measures
Proficient (90%)
Needs Improvement (70%)
Not Evident (0%)
Value
Provides a complete, clear, and
accurate explanation of why cost of
capital is important to a company
and what it measures, and
explanation is well-supported by
information from the course
textbook and resources
Provides an explanation of why the
cost of capital is important and what
it measures, but the explanation is
incomplete, unclear, inaccurate, or
not well-supported by information
from the course textbook and
resources
Does not provide an explanation
of why cost of capital is
important to an organization and
what it measures
30
Meaning of
Calculations
Meets “Proficient” criteria and
demonstrates a nuanced
understanding of what the
calculations mean for a business
Correctly identifies all of the
calculations involved in
determining the various costs of
capital and provides a complete,
clear, and accurate explanation of
what the calculations mean to
business, and explanation is wellsupported by information from the
course textbook and resources
Identifies calculations involved in
determining the various costs of
capital and provides an explanation
of what the calculations mean to
business, but calculations are
inaccurate, or explanation is
incomplete, unclear, inaccurate, or
not well-supported by the course
textbook and resources
Does not identify the calculations
involved in calculating the
various costs of capital or explain
what they mean to a business
30
Problems
Completes all assigned problems
without any errors
Completes all assigned problems
with 1 to 5 errors
Completes the assigned problems
with 6 errors
Does not complete the assigned
problems
30
Critical Elements
Articulation of
Response
Exemplary (100%)
Proficient (90%)
Submission is free of errors
Submission has no major errors
related to citations, grammar,
related to citations, grammar,
spelling, syntax, and organization spelling, syntax, or organization
and is presented in a professional
and easy-to-read format
Needs Improvement (70%)
Submission has major errors related
to citations, grammar, spelling,
syntax, or organization that
negatively impact readability and
articulation of main ideas
Not Evident (0%)
Value
Submission has critical errors
related to citations, grammar,
spelling, syntax, or organization
that prevent understanding of
ideas
Total
10
100%
MBA 520 Module Eight Activity Worksheet
Prompt: After reviewing the data in the problem, respond to the problems below. Indicate the
answer you believe is correct.
Rollins Corporation has a target capital structure consisting of 20% debt, 20% preferred stock, and
60% common equity. Assume the firm has insufficient retained earnings to fund the equity portion of
its capital budget. It has 20-year, 12% semiannual coupon bonds that sell at their par value of $1,000.
The firm could sell, at par, $100 preferred stock that pays a 12% annual dividend, but flotation costs
of 5% would be incurred. Rollins’ beta is 1.2, the risk-free rate is 10%, and the market risk premium
is 5%. Rollins is a constant growth firm that just paid a dividend of $2.00, sells for $27.00 per share,
and has a growth rate of 8%. The firm’s policy is to use a risk premium of 4% when using the bondyield-plus-risk-premium method to find rs. Flotation costs on new common stock total 10%, and the
firm’s marginal tax rate is 40%.
Cost of debt
1. What is Rollins’ component cost of debt?
a.
b.
c.
d.
e.
10.0%
9.1%
8.6%
8.0%
7.2%
2. What is Rollins’ cost of preferred stock?
a.
b.
c.
d.
e.
10.0%
11.0%
12.0%
12.6%
13.2%
3. What is Rollins’ cost of retained earnings using the CAPM approach?
a.
b.
c.
d.
e.
13.6%
14.1%
16.0%
16.6%
16.9%
4. What is the firm’s cost of retained earnings using the DCF approach?
a. 13.6%
b. 14.1%
c. 16.0%
5. What is Rollins’ cost of retained earnings using the bond-yield-plus-risk-premium approach?
a.
b.
c.
d.
e.
13.6%
14.1%
16.0%
16.6%
16.9%
6. What is Rollins’ WACC, if the firm has insufficient retained earnings to fund the equity portion
of its capital budget?
a.
b.
c.
d.
e.
13.6%
14.1%
16.0%
16.6%
16.9%

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