Question

Sears, Inc. common stock is currently trading on the NYSE at a

price of $30 per share with 24,000,000 shares outstanding. Dividend just paid is

$1.50 per share and is forecasted to grow at a constant rate of 12% in the future.

U.S. 10-year Treasury Notes are currently yielding 2.5% and Sear’s

outstanding 10-year debt with a face value of $50 million is currently trading at

96% of face value and pays annual interest of 10%. The expected rate of return

for the S&P 500 stock index (a proxy for the market) is 12%. Sear’s

corporate tax rate is 34% and its estimated beta coefficient for risk is 1.5.

*****Please show work on EXCEL spreadsheet, please show EXCEL formulas****

a) Estimate the cost of common equity capital for Sears using the

dividend growth model

b) Estimate the cost of common equity capital for Sears using the capital

asset pricing model (CAPM)

c) Estimate the weighted average cost of capital (WACC) for Sears

*****Please show work on EXCEL spreadsheet, please show EXCEL formulas****

Answer 1

a	Cost of Equity using DDM =D1/Price + growth rate	17.600%
b	Cost of equity using CAPM = Rf+ Beta*(Rm-Rf)	16.75%
c	Market value of Equity	720000000
	Market value of Debt	48000000
	Total value	768000000
	Cost of debt before tax	10.67%
	Cost of debt after tax	7.04%
	WACC	16.54%

WORKINGS