Question

What would Lyft Inc (LYFT)'s weighted-average cost of capital with this capital structure:

• 150 million shares of common stock with a market price of $72. Lyft's beta is .9. The current risk-free rate is 2.5% and the equity market risk premium is 5%.
• 60 million shares of preferred stock with a current price of $75 that pays $4 annual dividends.
• 5 million bonds with a 5% annual coupon rate (2.5% paid semi-annually), a 4% yield to maturity, with 20 years until maturity. These bonds are last traded for ~113.68% of their $1,000 face value. The marginal corporate tax rate is 21%.

What formula do you use to calculate the cost of equity?

	A.	Gordon growth model
	B.	Capital asset pricing model
	C.	Weighted average cost of capital

What is the cost of equity?

	A.	5.33%
	B.	7.00%
	C.	3.16%

What formula do you use to calculate the cost of preferred stock?

	A.	Capital asset pricing model
	B.	Gordon growth model
	C.	Preferred dividend yield

What is the cost of preferred stock?

	A.	3.16%
	B.	7.00%
	C.	5.33%

n this example, what should you use for the after-tax cost of debt when calculating your weighted average cost of capital?

	A.	Bond coupon rate and tax rate
	B.	Just the coupon rate as debt is no longer tax advantaged
	C.	Bond yield and tax rate

What is the after-tax cost of debt?

	A.	7.00%
	B.	3.16%
	C.	5.33%

What is the market value of the common stock?

	A.	$4.5 billion
	B.	$10.8 billion
	C.	$5.68 billion

What percent of your capital structure is in common stock?

	A.	51.47%
	B.	21.45%
	C.	27.09%

What is the market value of preferred stock?

	A.	$5.68 billion
	B.	$10.8 billion
	C.	$4.5 billion

Answer 1

A. CAPM will be used as data is available for that only

Cost of Equity = Risk free rate + beta*market risk premium

= 2.5% + 0.9*5%

= 7.00%

i.e. B

C.Preferred Dividend yield will be used

19.Cost = Annual dividend/Current price

= 4/75

= 5.33%

i.e. C

C.Yield and tax rate

After tax cost = Yield*(1-Tax rate)

= 4%*(1-21%)

= 3.16%

i.e. B

Market value of common stock = 150 million*72

= 10,800 million

i.e. B.10.8 billion

Percent = 10,800 million/(10,800 million +60 million*75 + 5 million*1000*113.68%)

= 51.47%

i.e A

Market value of preferred stock = 60 million*75

= C. $4.5 billion