Cost Of Debt And Equity Of Sensible Essentials Co

Cost Of Debt And Equitythe Manager Of Sensible Essentials Conducted An

Cost of Debt and Equity The manager of Sensible Essentials conducted an excellent seminar explaining debt and equity financing and how firms should analyze their cost of capital. Nevertheless, the guidelines failed to fully demonstrate the essence of the cost of debt and equity, which is the required rate of return expected by suppliers of funds. You are the Genesis accountant and have taken a class recently in financing. You agree to prepare a PowerPoint presentation of approximately 6–8 minutes using the examples and information below: Debt: Jones Industries borrows $600,000 for 10 years with an annual payment of $100,000. What is the expected interest rate (cost of debt)? Internal common stock: Jones Industries has a beta of 1.39. The risk-free rate as measured by the rate on short-term US Treasury bill is 3 percent, and the expected return on the overall market is 12 percent. Determine the expected rate of return on Jones’s stock (cost of equity). Here are the details: Jones Total Assets $2,000,000 Long- & short-term debt $600,000 Common internal stock equity $400,000 New common stock equity $1,000,000 Total liabilities & equity $2,000,000 Develop a 10–12-slide presentation in PowerPoint format. Perform your calculations in an Excel spreadsheet. Cut and paste the calculation into your presentation. Include speaker’s notes to explain each point in detail. Apply APA standards to citation of sources.

Paper For Above instruction

The task involves creating a comprehensive PowerPoint presentation that explains the concepts of cost of debt and cost of equity, utilizing specific financial data pertaining to Jones Industries. The presentation must be approximately 10–12 slides long, include detailed calculations embedded within Excel, and feature speaker’s notes elaborating on each point. The core objective is to convey the essential principle that both costs represent the required rates of return demanded by investors and lenders, reflecting the risk and opportunity costs associated with providing capital to the firm.

Firstly, the presentation should start with an introduction to the significance of understanding a firm’s cost of capital, emphasizing how it influences investment decisions, valuation, and overall financial strategy. Subsequently, it should delineate the concept of the cost of debt, demonstrating how it reflects the interest expenses associated with borrowed funds and the calculation methodology based on loan details.

The calculation of the cost of debt involves determining the effective interest rate that equates the present value of the loan's future payments to the borrowed principal. Using the data provided — a loan of $600,000 with annual payments of $100,000 over 10 years — the presentation should display the calculation process, typically involving the use of financial functions such as the RATE function in Excel. This calculation yields the firm's effective interest rate or cost of debt, representing the return lenders expect.

Next, the presentation should transition to discussing the cost of equity. It should introduce the Capital Asset Pricing Model (CAPM), which estimates the required return on equity based on systematic risk (beta), the risk-free rate, and the expected market return. The formula is:

Cost of Equity = Risk-Free Rate + Beta × (Market Return - Risk-Free Rate)

Applying the provided data — beta of 1.39, risk-free rate of 3%, and market return of 12% — the presentation demonstrates the calculation, highlighting how increased beta indicates higher risk and thus a higher expected return.

The presentation then contextualizes these calculations within Jones Industries’ financial structure, detailing its total assets, liabilities, and equity. It should analyze the implications of the calculated costs of debt and equity on the company's weighted average cost of capital (WACC) and strategic financing decisions.

Throughout, visual aids such as charts, graphs, and tables in PowerPoint should clarify the concepts and calculations, making them accessible and engaging for the audience. Speaker's notes should provide detailed explanations, ensuring the audience understands the significance of each step and the overall importance of accurately assessing the cost of capital.

Finally, the presentation should adhere to APA standards for citing sources, using credible financial literature, textbooks, or authoritative websites to support the calculations and conceptual explanations.

References

  • Damodaran, A. (2015). Applied Corporate Finance. Wiley Finance.
  • Brealey, R. A., Myers, S. C., & Allen, F. (2020). Principles of Corporate Finance. McGraw-Hill Education.
  • Investopedia. (2023). Cost of Debt. https://www.investopedia.com/terms/c/costofdebt.asp
  • Investopedia. (2023). Cost of Equity. https://www.investopedia.com/terms/c/costofequity.asp
  • Damodaran, A. (2023). Equity Risk Premiums (ERP): Demystifying the Data. Journal of Applied Corporate Finance, 35(1), 1-14.
  • US Department of the Treasury. (2023). Daily Treasury Yield Curve Rates. https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics
  • Financial Management, 2nd Edition. (2020). McGraw-Hill.
  • Corporate Finance Institute. (2023). What Is WACC? https://www.corporatefinanceinstitute.com/resources/knowledge/finance/wacc/
  • Morningstar. (2022). Understanding Beta. https://www.morningstar.com/articles/105927/understanding-beta
  • www.federalreserve.gov. (2023). Economic Research and Data. https://www.federalreserve.gov/econres.htm

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