1. Case Study Financial Management Principles FINA3311 Section: 202
Wehad Al-Kaltham
Sara Al-Madani

2. Outline
What sources of capital should be included when you estimate BHH’s weighted average cost of capital (WACC)?
What is the market interest rate on BHH’s debt and its component cost of debt?
BHH does not plan to issue new shares of common stock. Using the CAPM approach, what is the BHH’s estimated cost of equity?
What is the estimated cost of equity using the constant dividend growth model?
What is BHH’s WACC?
How is any firm’s stock price (or the value of the firm)
related to WACC?
What could be your suggestion to reduce WACC?

3. Known for long-term capitals decision of investments and budgeting.
What sources of capital should be included when you estimate BHH’s weighted average cost of capital (WACC)?
Known for long-term capitals decision of investments and budgeting.
It include long-term dept such as preferred stock and common stock which are used to pay the assets.
If a firm used short-term such as payables to gain fixed assets without accomplishing any finance works and needs then WACC will include debt components.

4. What is the market interest rate on BHH’s debt and its component cost of debt?
PMT= .12 ÷ 2 = (.06 × 1000) = 60
N= 10 × 2 = 20
PV= -1140
FV= 1000
YM= 4.89%

5. BHH does not plan to issue new shares of common stock
BHH does not plan to issue new shares of common stock. Using the CAPM approach, what is the BHH’s estimated cost of equity?
Kj= ( )
= (1.30) (0.06)
= (0.07) + (0.078)
= X 100
= 14.8%

6. ( D1 ÷ P0) + g D1= D0= (1+0.05) = (4.19) (1.05) = 4.3995
What is the estimated cost of equity using the constant dividend growth model?
( D1 ÷ P0) + g
D1= D0= (1+0.05)
= (4.19) (1.05) =
= ( +0.05) = ×100
= 13.8%

7. What is BHH’s WACC? Wb (Kb) (1-T) + We (Ke) + Wp (Kp)
= 30% (1.05) (1-30%) + 50% (7.07%) + 20% (8.10)
= (.315) (.7) + (.03) + (.0162) =
= × 100
= %

8. Continue Kb= Coupon Rate ÷ Current price = 12% ÷ 1140 = 1.05
Ke= Krf + β (Km – Krf)
= 7% % (13% - 7%)
= 0.070
= 7.07%
Kp= D1 ÷ P0 – F
= .09(100) ÷ ( )
= 9 ÷ 111.1
= × 100
= 8.10%

9. How is any firm’s stock price (or the value of the firm) related to WACC?
The minimum WACC occurs means that the firm’s value is at its maximization
WACC is at its maximum the firm’s value will me at its lowest
They have an inverse relationship

10. What could be your suggestion to reduce WACC?
Companies with high WACC want and need to balance their invested capital to the equity so as to generate cash.
Because generating cash conflicts with commitment of paying for the bonds which are source of the company’s finance, as an analyst
Suggesting: These companies try to delay the payment of some stock dividends if the other party agrees or the contract allows that.
By this way, the company will have liquidity that prevents the company from eating itself.

11. Any Question ?
Thank You