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 Energy 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:
1
2
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
Long- & short-term debt
Common internal stock equity
New common stock equity
Total liabilities & equity
$2,000,000
$600,000
$400,000
$1,000,000
$2,000,000
Develop a 10–12-slide presentation in PowerPoint format. Perform your calculations in
an Excel spreadsheet. Cut and paste the calculations into your presentation. Include
speaker’s notes to explain each point in detail. Apply APA standards to citation of
sources.
Assignment 2 Grading Criteria
Calculated the expected interest rate (cost of debt).
Calculated the expected rate of return on Jones’s stock (cost of equity).
Wrote in a clear, concise, and organized manner; demonstrated ethical
scholarship in accurate representation and attribution of sources; displayed
accurate spelling, grammar, and punctuation.
