| Course | GB550 Financial Management |
|---|---|
| Unit | Unit 6 |
| Paper type | Cost of capital estimate |
| Length | About 870 words, 6 pages double-spaced |
| Format | APA 7 student paper |
| School | Purdue University Global |
| Program | MBA |
| Updated | October 2026 |
Free sample paper for GB550 Unit 6
Where the Term's Figures Meet: A Unit 6 Cost of Capital Estimate of 8.27 Percent for a Barge Operator
[Student Name]
Purdue University Global
GB550: Financial Management
Unit 6 Cost of Capital Estimate
[Instructor Name]
[Date]
The barge operator and every price, yield and weight are composite and illustrative; the models and sources cited are real.
Block 1: Debt at Market Value
Unsecured notes: $250.0 million face at the Unit 3 price of 94.42 percent, $236.0 million, yielding 7.05 percent.
Secured equipment notes: $109.0 million at market, the $110.0 million issue priced at 99.10, yielding 5.61 percent.
Bank loan: $60.0 million at par, priced at 6.60 percent.
Total debt at market: $405.1 million, against $420.0 million at book.
Block 2: Cost of Debt
Weighting each yield by its market value gives a blended rate before tax of 6.60 percent: 58.3 percent at 7.05, 26.9 percent at 5.61 and 14.8 percent at 6.60. Interest is deductible, so at the 24 percent tax rate the after-tax cost is 6.60 × 0.76 = 5.01 percent. Brigham and Ehrhardt (2020) emphasize that the relevant cost is the yield on debt today, not the coupons the company agreed to years ago, which is why the 6.125 percent coupon on the unsecured notes plays no part.
Block 3: Cost of Equity
Capital asset pricing model. Risk-free rate of 4.4 percent, the ten-year Treasury yield on the estimate date from the Treasury's daily yield curve, plus beta of 1.18 times a 5.0 percent market premium: 4.4 + 5.9 = 10.30 percent. A ten-year rate is used because barges last decades; a short-term bill rate would understate the cost of capital for long-lived assets.
Dividend model check. The price-implied return from Unit 4, 0.9936 / 22.80 + 3.5 percent, is 7.86 percent.
Choice. The two estimates differ by 2.4 points, which usually means one model's inputs are wrong rather than that the truth lies halfway. The dividend model's result depends heavily on its 3.5 percent growth assumption, and Unit 4 showed that the market price implies faster growth than that. If growth is in fact higher, the dividend model understates the return. The estimate therefore uses the capital asset pricing figure of 10.30 percent. Graham and Harvey (2001) found that most large companies use that model to estimate the cost of equity, which supports the choice.
When two equity estimates are 2.4 points apart, averaging them hides the question of which set of inputs is wrong.
Block 4: Equity at Market Value
28.4 million shares at $22.80 are worth $647.5 million. Total capital at market is $405.1 million plus $647.5 million, $1,052.6 million, so equity carries 61.5 percent of the total and debt 38.5 percent.
Block 5: The Weighted Average
WACC: 0.615 × 10.30 + 0.385 × 5.01 = 6.34 + 1.93 = 8.27 percent.
Summary Table
Market weights, base case: 8.27 percent.
Book weights, with debt at $420.0 million and equity at $539.8 million, 43.8 and 56.2 percent: 0.562 × 10.30 + 0.438 × 5.01 = 7.99 percent.
Leases counted as debt. The company charters towboats under long agreements whose remaining payments are worth about $46 million at a 6.8 percent rate. Treating them as debt raises debt to $451.1 million and its share to 41.1 percent, with a blended after-tax debt cost of about 5.03 percent. The weighted cost falls slightly, to 8.14 percent, because more of the capital is counted at the cheaper debt rate.
Current lease accounting puts most such obligations on the balance sheet (Financial Accounting Standards Board, 2016), and analysts increasingly treat them as debt. Sections differ on whether a cost of capital estimate should include them, so the estimate reports both figures.
Sensitivity of the Rate
Two inputs move the result most. A market premium of 6.0 percent instead of 5.0 raises the cost of equity to 11.48 percent and the weighted rate to about 8.99 percent. Using the adjusted beta of 1.12 lowers the cost of equity to about 10.0 percent and the weighted rate to about 8.08 percent. The range from roughly 8.1 to 9.0 percent is the honest uncertainty around the 8.27 figure, and Unit 7's projects should be tested at both ends, since a project that clears 8.27 percent but not 9.0 percent depends on the premium as much as on its own cash flows.
Why Market Weights
Book weights reflect what investors put in years ago; market weights reflect what they could get back today, which is the opportunity the company must beat. Koller et al. (2020) recommend market weights, or a target structure close to them, for that reason. The difference here is 0.28 points, enough to change a marginal project's verdict.
What the Rate Is For
The 8.27 percent rate is the hurdle for projects with the company's average risk. It is used in Unit 7 for the barge replacement decision. A project riskier than the company's average, such as a tank barge fleet serving a single customer in Unit 8, warrants a higher rate. A project financed on different terms does not change the rate, because the rate reflects the risk of the assets, not the source of the money for any one purchase.
References
Brigham, E. F., & Ehrhardt, M. C. (2020). Financial management: Theory and practice (16th ed.). Cengage.
Financial Accounting Standards Board. (2016). Leases (Topic 842) (Accounting Standards Update No. 2016-02).
Graham, J. R., & Harvey, C. R. (2001). The theory and practice of corporate finance: Evidence from the field. Journal of Financial Economics, 60(2-3), 187-243. https://doi.org/10.1016/S0304-405X(01)00044-7
Koller, T., Goedhart, M., & Wessels, D. (2020). Valuation: Measuring and managing the value of companies (7th ed.). Wiley.
GB550 Unit 6 instructions, in plain terms
GB550 Unit 6 asks you to estimate a company's weighted average cost of capital. Value each debt instrument at market and blend their yields into a pre-tax and after-tax cost of debt. Estimate the cost of equity, ideally with two methods, and explain which you rely on if they disagree. Value equity at market. Combine the pieces into a weighted average, showing each weight and cost. Report how the result changes with book weights and with leases counted as debt. Test the sensitivity to the market premium and beta. Explain why market weights are preferred and what the rate should be used for. Organize roughly five pages as blocks ending in a summary table, and cite sources in APA 7.
How this GB550 Unit 6 example is built
Debt is valued instrument by instrument from Unit 3 and weighted 58.3, 26.9 and 14.8 percent, with Brigham and Ehrhardt on using current yields. Equity uses a ten-year Treasury of 4.4 percent and beta of 1.18 for 10.30 percent; the dividend model's 7.86 percent is set aside, with Graham and Harvey on practice, and the highlighted sentence warns against averaging. The weighted line reads 0.615 × 10.30 + 0.385 × 5.01. Book weights and leases, under the lease accounting standard, give 7.99 and 8.14. Sensitivity to the premium and beta runs from about 8.1 to 9.0 percent, and Koller and colleagues support market weights over book.
GB550 Unit 6 rubric: what earns full points
A strong GB550 cost of capital estimate is graded on whether every weight and cost can be traced to an earlier figure. Valuing debt instrument by instrument at market earns points. Using current yields rather than coupons shows understanding. Two equity estimates with a reasoned choice show judgment. A final line showing each weight and cost lets a grader recompute the rate. Reporting book weights and lease treatment shows awareness of conventions. A sensitivity range shows honesty about uncertainty. Explaining why market weights fit shows conceptual grasp. Stating what the rate is for shows practical sense. Brigham and Ehrhardt, Graham and Harvey, the lease standard, and Koller and colleagues are cited.
GB550 Unit 6 help from the desk
Many GB550 Unit 6 papers weight debt and equity at book values or treat old coupons as today's borrowing cost, both of which misstate the opportunity cost investors face. Others average two very different equity estimates without asking which inputs are wrong. A frequent gap is leases: long charters commit the company to fixed payments, and the paper should show the rate with and without them. Some writers apply the company rate to every project regardless of risk. Value each instrument at market, blend yields after tax, estimate equity two ways and choose, weight at market, show alternatives and sensitivity, and say which projects the rate fits.
Get a GB550 Unit 6 example written to your instructions
Send what your Unit 6 case supplies, whether bond prices, beta, share count or dividend history, with the prompt and rubric. Each component of the estimate is built separately, each input traced to its source and each weight taken at market value, with a cross-check on equity. The first custom sample carries no charge and generally arrives within 24-48h. The paper above is an original model document written by our desk, not a submitted student paper and not an official Purdue University Global document.
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GB550 Unit 6 questions, answered
Should chartered or leased assets count as debt?
Analysts increasingly treat long leases as debt because they commit the firm to fixed payments much like a loan, and current accounting puts most of them on the balance sheet. Sections differ on whether the cost of capital estimate should include them. The sample shows the rate both ways, 8.27 and 8.14 percent, so a grader can see the effect whichever convention applies.
Why not average the two equity estimates?
Because a 2.4-point gap between 10.30 and 7.86 percent usually signals that one model's inputs are wrong, not that the truth lies halfway. The sample explains why it trusts the pricing model more for this firm: the dividend model's result depends heavily on a growth assumption that the market price may be contradicting. Some instructors accept averaging when the estimates are close.
Which risk-free rate should be used?
Most sections expect a long-term Treasury yield, often the ten-year, for a rate applied to long-lived projects. A short-term bill rate understates the cost of capital when the projects last decades, as barges do. The sample states the maturity, the date and the source for its 4.4 percent, and the custom version does the same with current figures.
Where can I find a free GB550 Unit 6 sample paper?
This page carries a full GB550 Unit 6 cost of capital estimate for a composite barge operator, with market-value debt, two equity estimates, an 8.27 percent rate, alternatives and APA 7 references.
Why does counting leases as debt lower the rate?
Because more of the capital is then counted at the after-tax cost of debt, about 5.03 percent, rather than the 10.30 percent cost of equity. The weighted rate falls slightly, from 8.27 to 8.14 percent.