1. FINANCIAL MGMT. PRINCIPLES
Section : 203
Case Study
Submitted by:
Aala ALSheddi ID:
Lujayn Tahlawi ID:
Fatima ALBagshi ID:
Naema ALYahya ID:

2. A. What sources of capital should be included when you estimate BHH’s weighted average cost of capital (WACC)?
Weighted Average Cost of Capital (WACC) is the average cost to a company of the funds it has invested in the assets of the company. This is composed of a possible combination of debt, preferred shares, common shares and retained earnings. All components of the cost of capital are determined at the current market rates. It used mainly for making long-term capital investment decisions.
Capital can be acquired from four possible sources to pay for long-term assets:

3. A
Capital can be acquired from four possible sources to pay for long-term assets:
Debt is borrowed from banks, insurance companies, governments and through the issuance of bonds to investors. The cost of debt is determined by the interest rate paid to the supplier of these funds.
Preferred shares are similar to debt in that the owners of the preferred shares are paid a regular fixed payment, like an interest payment. Unlike debt, the preferred shares are never repaid, the shares remain outstanding indefinitely, and the dividend payments are made for as long as the shares remain outstanding.

4. A
Common equity is acquired by a firm when they sell shares to the public. The holders of the shares expect to be compensated for the use of their capital, as well as the risk they take by investing directly in the company as an owner.
Retained earnings are acquired by a company from the profits it generates through its operations. The retained earnings are assumed to be the equity of the shareholders that have been reinvested in the company rather than paid out through dividends.

5. A
The sources of capital to pay for short-term assets:
spontaneous are liabilities that result from the purchasing of goods or services on credit incur the obligation to later pay for these goods or services at some time in future such as account payable and accrued liabilities.
Interest-bearing debt is investments such as bonds and certificates of deposit that pay regular, periodic interest.

6. B. What is the market interest rate on BHH’s debt and its component cost of debt?
N=20
PV= -1,140.00
PMT= 0.12*1,000=120\2=60
FV=1000
I=4.89

7. K j = K rf + B ( Km –K rf) = .07 + 1.3 (.13-.07) = 14.8 %
C. BHH does not plan to issue new shares of common stock. Using the CAPM approach, what is the BHH’s estimated cost of equity?
K j = K rf + B ( Km –K rf)
= ( )
= 14.8 %

8. D (1+g) / Res – g = 4.19 (1+.05) / .13 - .05 = 4.3995 / .08 = 54.99
D. What is the estimated cost of equity using the constant dividend growth model?
D (1+g) / Res – g = 4.19 (1+.05) /
= / .08 = 54.99

9. E. What is BHH’s WACC?
WACC = [rD*( WD )*(1- Tc )] + [ rp*( Wp )] + [ rE*( WE )]
= [.0489*( .3 )*(1-.3)] + [ .0884*( .2 )] + [ .148*( .5 )]
=10.19%

10. F. How is any firm’s stock price (or the value of the firm) related to WACC? Explain in words.
The capital funding of a company is made up of two components: debt and equity Lenders and equity holders each expect a certain return on the funds or capital they have provided.

11. F
The cost of capital is the expected return to equity owners (or shareholders) and to debt holders, so WACC tells us the return that both stakeholders - equity owners and lenders - can expect. WACC, in other words, represents the investor's opportunity cost of taking on the risk of putting money into a company.

12. G.As a financial analyst, what could be your suggestion to reduce WACC?
From a value-creation standpoint, the lower the company’s WACC, the better. More value is created by a lower WACC because of the resulting increased spread between it and the ROIC.
The most effective ways to reduce the WACC are to: (1) lower the cost of equity or (2) change the capital structure to include more debt

13. Thank You