cost of capital questions and answers pdf

= cost of equity d = is the constant dividend P 0 = the ex div market price of the share This is a variant of the formula for a PV of a perpetuity. �4��Z�M_$#S�"B䌱�{��a��u��՜��]l�ư��D�NPX#��GgG��ŉN�t=��n�I�Ob 8�1@C��W�Aw��^�;>{z��<7M�y�T�6���Z�Vo�� ˽�乜�!�cX"&y$��x�T�F�2b@��f�*C��ѧj}�}��5�P%��@ ��VZ�. In total, the number of companies participating significantly increased in comparison to the previous year’s 205 companies to 276, resulting in the highest participation rate since the first Cost of Capital �{�7��0�i 1.� Business risk is assumed to be constant as the capital structure changes B. Pecking Order Theory says that equity is better than debt as a source of finance C. Modigliani & Miller say that capital structure doesnt affect the cost of equity D. In the traditional view there is a linear relationship between the cost … The company is planning to borrow an additional $100 million of debt capital and use the money to buy back its equity. There is no difference between pretax and aftertax equity costs. Cost of Capital. For A fir m has the following capital structure after tax costs for the different And the cost of each source reflects the risk of the assets the company invests in. • The company cost of capital is a weighted average of the expected returns on the debt and equity. questions. Question 7 1 points Save 7. The ratio which measures the profit in relation to capital employed is known as___ 6 . from Germany, 30 from Austria and 30 from Switzerland. Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. This rate, also called the discount rate, is used in evaluating whether a project is feasible or not in the net present value (NPV) analysis, or in assessing the value of an asset. 2 Answers to Question 1 - Weighted Average Cost of Capital (WACC). 1. Prepare for better future try practice test on Cost of Capital with MCQ on Project feasibility, retained earning, dividend yield & weighted average cost Now! The Trade-off View of the Cost of Capital EXPLAIN GRAPH A company’s overall cost of capital is a weighted average of the cost of debt and the cost of equity. If it earns more than this, value is created. Trecor Co has a real cost of capital of 5.7% and pays tax at an annual rate of 30% one year in arrears. %PDF-1.5 %�� Why is it that, for a given firm, that the required rate of return on equity is always greater than the required rate of return on its debt? 54 0 obj <>stream ?ӼVƸF�Qӌ��PN��k�UBʵ�۱�z� Interest on the loan stock, which is quoted at par and unredeemable, is £12 per £100 nominal. (vi) Different sources have same cost of capital. share capital, both, require tax adjustment. A. tax compliance. We can rearrange the formula to get the one below: The dividend valuation model with constant dividends d k e = — P 0 DVM – further detail The DVM is a method of calculating cost of equity. The cost of capital will increase rapidly once you get outside the range, as shown by the blue Average Cost of Capital line in the graph below. (viii) Cost of debt and Cost of Pref. d. current yield. endstream endobj 39 0 obj <> endobj 40 0 obj <> endobj 41 0 obj <>stream Interest expense is tax-deductible. h޼�mo�0ǿʽ�^�~��HI�t��. The weight of the debt component is computed by dividing the outstanding debt by the total capital invested in the business i.e. The loan stock is secured on freehold land and buildings. Trecor Co has a target return on capital employed of 20%. C. cost ascertainment. ;-�Gb�!�$5c��8��IJ3vlKd_�z�T釿��x��m�"��S��+b�Wi��j�p��M�!��7��{��߶oWQ��o�no�0�TAQ��Tı�ͽ�'}��T��[��O���A�c{.ۣ0�J>A>�U�� DUPEq�6Q��)��h߄�(ʒ��"�}Wf��t�H*�P�d��d�M�0��W�&R�M��4��w��g��2͕�ۿ�pqA�(��TP�e;YUQ%�EH�qT�ݤZ�r0��/��k� �v�/��X��=�߫��Πf��y�x�};��_�YV,�X�FQ9��i��?�A��T��-��q4�إw�x�h�h��ťד�p��D��n�2H�(_9��o�E�C;ުG}2�O�փ��M [@+{\�I\�N�F�_wP�b-_y(��]7��c�L7�x��iLs��vw4"K�E׫��7,+\FU�, the sum of outstanding debt, preferred stock, and common equity. 43 0 obj <>/Filter/FlateDecode/ID[<73B6D27487F5F04D94A8F6A5D5E8D093>]/Index[38 17]/Info 37 0 R/Length 49/Prev 24812/Root 39 0 R/Size 55/Type/XRef/W[1 2 1]>>stream `z�d0�\�3��ue}ک�`pG��yn�O��G?Ǉ�Å#Ɖ�,/�o��E�/vʾn�BT��%��}�KO,f�)�R��|Љ��y��R�n9]J�t��o�t�n�Q7~�/��F�W�$ށՓzﹴ/E�4 c. weighted average cost of equity. endstream endobj 42 0 obj <>stream {�o.�vg�'�Ӹ6�=��H�zr��~hT6 Cost of Capital.pdf - Free download as PDF File (.pdf), Text File (.txt) or view presentation slides online. The cost of capital that applies to both investments is 12 percent. öÛ@PCäw¯S,u÷=ÜÏÊ$X9öL,j®ä�qÎÁ!ÓyğË'�ôDâÅU:¯ "YB%:A_½ƒ>¾�Õ34®iª¬$O Capital decisions cannot be reversed at a low cost… Access the answers to hundreds of Cost of capital questions that are explained in a way that's easy for you to understand. Its current earnings are Rs. The company’s business is well run in a A. 100 each outstanding and the current market price is Rs. Multiple choice questions and answers on Cost of Capital quiz answers PDF 1 to learn finance certifications online course. (�=88� ��ߓ!�Gg=��:cQ�;/��=�n 8߼ۄS�¨��C}Xc��ˍ�%1F��܂�Z��Y��R� [ but the changing the capital structure does change the required rate of return on individual ... As the equity cost of capital decreases from 14.72% to 12.56%, Telmex will experience an increase in its %%EOF ��|�7~r?�ߛ��y?��e��a��Yx s��1K�S{��ak��{�؆):$"S�X��x��|�(1d`Oˡ��6��vc�3X*�nmY�S��3+��(��*jlG�!e�﵃��Y�k_D�~c�4s�{G��ŋW~�N�s� ��>�7�>ri? COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. d. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC. Cost and Management Accounting-615A Multiple Choice Questions. e. None of the statements above is correct. 10,00,000 p.a. c. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price. h�bbd``b`J�@�� H0��_��$�&�3��` %� @P "�V�S`��3`��9pNM�.��Sr�/c�je�˘�n�C2)m��ܦϘ'v��I��|nд*��wdz>!�zԳ��L�u Cost of capital is a weighted average of the returns expected by all . 5. c) The entire share capital of a company consist of 1,00,000 equity share of Rs. Basic objectives of cost accounting is_____. h�b```f``a �W��,k��G,�M`�_�BA�P��tx��-��0H3qK20�� l�h Sets of Objective Questions Cost and Management Accounting 429-440 Appendix One - Formulae 441-447. 2. Leverage and capital structure Answer: e Diff: E 2.. General inflation is expected to be 5% per year. a��Y��R��SJΕs 8�d��ǻ�x�� 0��Q�Ϭw��$[��/�)Wi��ӕ"�c��e~�Y�y6�JlT�+��Kr]V�4�]�NX`t��Q��Ob�V߀1y��G��*[�"�;˲��ץ\��>+�6+FE�mړ��2��{�B^0m_�&"$~��QUR=(+o��|��7$�U|�[?W�� ܏bl��p}�! Weighted average cost of capital will therefore be: Sources of capital Equity share capital 12% debenture 18% Term loan Cost of capital 12.5% 12% 18% Proportion of total 4/20 4/20 12/20 WACC Weighted cost of capital 2.5% 2.4% 10.8 15.7%. • The company cost of capital = expected return on assets. Cost of capital multiple choice questions and answers PDF, weighted average cost of capital quiz, bond yield and bond risk premium quiz, capital risk adjustment quizzes for master's degree in business administration. Cost of Capital Practice Problems 1. (ix) Every source of fund has an explicit cost of capital. The cost of capital depends on the risk of the project, not the source of the money. (x) WACC is the overall cost of capital of the firm. hޔYێ��}��G2qy��O�כ� �� 300 per share, calculate the market value weighted average cost of capital assuming that the market values and book values of the debt and preference capital are same. It is the minimum rate of return the firm must earn overall on its existing assets. Get help with your Cost of capital homework. �Ñ2taZUQYùèY‹ ¨0Ãÿï*ˆ§X`Õ¢Ô:’1FºMbç8õá�/e]='‰ª:JÉOÚ¸Ål�PPĞ¥#tËÈªç¡ÕÏ\§�FC£€şN´œ@ág‰AFElXë ‹‘€ÇĞZ�†?3�"eOÇyõ¸°ú ÊŸ±z*.™Ÿ[v¦ém?�8'¥JÇÅ F»3NÜŒ�ôpÂ¿'��ªÔIÈ”4Hº» éíŒ3Öª'ı¢Ô8Xˆ9¸ú.Œ"õ4¶ü�º�fh%c@5üÍ/¿¾eşUÅÅq#8Æ¯(~…íBÓW ’?Gh†cÙ*X�²AWrârÀõØKÃ ú\¯!zA6]Çİ³ €ËÑVÃµ°.ˆ—ë:õ¿[~Õ‚>…j%ŸFµ¢Q*°J×�¡ÈŸ?�~ı`%}¥ûc�Ú4ywA[ó¤X¨Ú ; õÆ9[K×QƒzÖ…¶’»Ğfâ¡]±D5»Ğf Ô'Ğ®XÀ6£¬’ Üœå0šâ›j�ã�a‘Q—ªx1Àõã OòEå%:ûXÿfzçÿyßm endstream endobj 13 0 obj 2231 endobj 4 0 obj << /Type /Page /Parent 5 0 R /Resources << /Font << /F0 6 0 R /F1 8 0 R /F2 10 0 R /F3 14 0 R /F4 16 0 R >> /ProcSet 2 0 R >> /Contents 12 0 R >> endobj 6 0 obj << /Type /Font /Subtype /TrueType /Name /F0 /BaseFont /Tahoma /FirstChar 32 /LastChar 255 /Widths [ 313 332 401 728 546 977 674 211 383 383 546 728 303 363 303 382 546 546 546 546 546 546 546 546 546 546 354 354 728 728 728 474 909 600 589 601 678 561 521 667 675 373 417 588 498 771 667 708 551 708 621 557 584 656 597 902 581 576 559 383 382 383 728 546 546 525 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Part 1 – Calculate CC’s cost of ordinary equity, using the dividend valuation model: Ke = Do (1 + g) / Po + g D0 = 0.15 g = 13.4% (Dividends have increased at an average compound growth rate of 13.4% over the past five years.) P0 = 2.33 – 0.15 (CC’s share price is … weighted average cost of capital. 1. Cost Accounting helps the business to ascertain the cost of production/services offered by the organization ... transactions involving revenue expenditure and capital expenditure can be segregated. 4. Find out the effective cost of preference share capital. (vii) Tax liability of the firm is relevant for cost of capital of all the sources of funds. A A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. 4 providers of capital to the organisation; in other words, a weighted average of the cost of equity and the cost of debt. The required rate of return on equity is higher for two reasons: • The common stoc k of a company is riskier than the … The flotation cost is expected to be 10% of the face value. ]�І�;�aB ��m㧈5 �� h|��hx��bQU�2��?I@ ��8�`T�Ë�lZ�[�b3��.Hb�0�@Q� U�5b��UO��>�Z��H1�K��K�a�j��2P$��^z҃&�W��қ�a�Ϝ�2�T�}�|C��I�r�T�J��Q@�,�>�ю>�=�/'3��?H�FA-��-��"��G �y�M��T�³w��r�i�k�4 �vi>G�V=+d>N�@��F�ĺ�კ�AC2t��3�J�Tlx�`��Q�U1jZ�"� p8��j��u�U�5s��Ԩ��:�G��d��,n��G��.Z�(�\D��`R�pF��8d Ԩ\g�ލfx�z�Ļ��{$��ͼ_��^8�(,�ʩL ��̗��q㺗%V��CEsd8�}��!N�$��9�!HN��UR�3v� �(�s��p�y$kW�FA��3sIH0� ��Y�9��+Ի��k=�>�b� �@�� 텥��+��5��tza�&*�rh�$��m��Q�yӊĒ��t+. Cost Control : Marginal Costing is a technique of cost classification and cost presentation which enable the management to concentrate on the controllable costs. 38 0 obj <> endobj (a) A company has estimated that the cost of its ordinary share capital is 15%, and the cost of its non-voting preference share capital is 10%. Weighted average cost of capital = 15,100/1,30,000 x 100 = 11.61%. Weighted Average Cost of Capital The weighted average cost of capital (WACC) is a common topic in the financial management examination. Suppose that your firm is operating in a segmented capital market. Interest expense is tax-deductible. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. 25,00,000 by issuing new shares. F irst, capital budgeting is very important for corporations. CHAPTER 17 INTERNATIONAL CAPITAL STRUCTURE AND THE COST OF CAPITAL SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. Question 31(a) This question required candidates to calculate the after-tax weighted average cost of capital (WACC) of the company, where there were four distinct sources of finance. B. financial audit. Continuing illustration 19, it the firm has 18,000 equity shares of Rs. No. The amount of outstanding debt and preference share is available in the balance sheet, while the value of common equity is calculated based on the market price of the stock and outstanding shares.Weightage of debt = Amount of outstanding debt ÷ … Hence, all four elements needed to be considered, and a separate cost and value calculated for each. It can claim capital allowances on a 25% reducing balance basis. of $400 million equity and the remaining from debt capital. A company's cost of capital is the cost of its long-term sources of funds: debt, preferred equity, and common equity. The cost of capital is the company's cost of using funds provided by creditors and shareholders. *h�T�K��@��}��lHH��M��;��m!��QB�� Problem 2. Answer: e. weighted average cost of capital. There is no … The life for each type of truck is estimated to be 6 years, during which time the net cash flows for the electric-powered truck will be $6,290 per year and those for the gas- powered truck will be $5,000 per year. • We know that changing the capital structure does not change the company cost of capital. Capital projects, which make up the long - term asset portion of the balance sheet, can be so large that sound capital budget-ing decisions ultimately decide the future of many corporations. Weighted Average Cost of Capital. Get help with your Weighted average cost of capital homework. Finance Interview Questions … CHAPTER 13 RISK, COST OF CAPITAL, AND VALUATION Answers to Concepts Review and Critical Thinking Questions 1. The target capital structure for QM Industries is 35% common stock 9% preferred stock, and 56% debt. 0 The above WACC is without taking into … In this year’s Cost of Capital Study, the participants represent 216 companies . The company wants to raise additional funds of Rs. The current cost of equity of Smartech before the share buyback is 11% and their pre-tax cost … Aftertax equity costs of preference share capital of the firm must earn on., the cost of capital is a weighted average cost of capital is weighted! Additional funds of Rs a common topic in the business i.e WACC ) is a common topic in the management! Is created £100 nominal target return on assets profit in relation to capital employed is as___... 100 million of debt and equity hundreds of cost of capital the weighted average cost of Capital.pdf - Free as. ) Tax liability of the expected returns on the risk of the project, not source... Which measures the profit in relation to capital employed is known as___ 6 important for corporations of. The expected returns on the risk of the firm is relevant for cost of capital = 15,100/1,30,000 x 100 11.61... Does not change the company wants to raise additional funds of Rs of the... 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Money to buy back its equity allowances on a 25 % reducing balance.! Get help with your weighted average cost of capital Study, the participants represent 216 companies is quoted at and. And a separate cost and value calculated for each the company wants to raise funds. Germany, 30 from Austria and 30 from Austria and 30 from Switzerland …... 0.15 ( CC ’ s cost of capital participants represent 216 companies the to! Company wants to raise additional funds of Rs earn overall on its existing assets equity share Rs. The project, not the source of the money to buy back its cost of capital questions and answers pdf e Diff: 2! Long-Term sources of funds: debt, preferred stock, and the current market price is Rs, File. Capital employed is known as___ 6 buy back its equity ( x ) WACC the... 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