cost of capital questions and answers pdf

38 0 obj <> endobj from Germany, 30 from Austria and 30 from Switzerland. Weighted average cost of capital = 15,100/1,30,000 x 100 = 11.61%. ;-�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�, CHAPTER 17 INTERNATIONAL CAPITAL STRUCTURE AND THE COST OF CAPITAL SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. 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%. Basic objectives of cost accounting is_____. General inflation is expected to be 5% per year. 5. P0 = 2.33 – 0.15 (CC’s share price is … It can claim capital allowances on a 25% reducing balance basis. Weighted Average Cost of Capital The weighted average cost of capital (WACC) is a common topic in the financial management examination. The flotation cost is expected to be 10% of the face value. B. financial audit. The company is planning to borrow an additional $100 million of debt capital and use the money to buy back its equity. A. öÛ@PCäw¯S,u÷=ÜÏÊ$X9öL,j®ä�qÎÁ!ÓyğË'�ôDâÅU:¯ ­"YB%:A_½ƒ>¾�Õ34®iª¬$O 25,00,000 by issuing new shares. 0 Answer: e. weighted average cost of capital. The cost of capital will increase rapidly once you get outside the range, as shown by the blue Average Cost of Capital line in the graph below. The ratio which measures the profit in relation to capital employed is known as___ 6 . The target capital structure for QM Industries is 35% common stock 9% preferred stock, and 56% debt. endstream endobj startxref Leverage and capital structure Answer: e Diff: E 2.. Question 31(a) This question required candidates to calculate the after-tax weighted average cost of capital (WACC) of the company, where there were four distinct sources of finance. 300 per share, calculate the market value weighted average cost of capital assuming that the market values and book values of the debt and preference capital are same. ���|�7~r?�ߛ��y?��e���a��Yx s��1K�S{�����ak��{�؆):$"S�X���x���|�(1d`Oˡ����6���vc�3X*�nmY�S���3+���(��*jlG�!e�﵃���Y�k_D�~c�4s�{G���ŋW~�N�s� ���>�7�>ri? [ but the changing the capital structure does change the required rate of return on individual The cost of capital that applies to both investments is 12 percent. 2 Answers to Question 1 - Weighted Average Cost of Capital (WACC). (x) WACC is the overall cost of capital of the firm. *h�T�K��@��}��lHH���M��;����m!����QB�� Cost of capital is a weighted average of the returns expected by all . 4 providers of capital to the organisation; in other words, a weighted average of the cost of equity and the cost of debt. Interest expense is tax-deductible. 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 ÷ … 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. endstream endobj 39 0 obj <> endobj 40 0 obj <> endobj 41 0 obj <>stream �4��Z�M_$#S�"B䌱�{��a��u��՜��]l�ư��D�NPX#���GgG���ʼnN�t=���n�I�Ob ’8�[email protected]��W�Aw��^�;>{z��<7M�y�T�6����Z�Vo�� ˽�乜�!�cX"&y$��x�T�F�[email protected]���f�*C��ѧj}�}��5�P%�����@ ��VZ�. No. 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 … A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. endstream endobj 42 0 obj <>stream The required rate of return on equity is higher for two reasons: • The common stoc k of a company is riskier than the … Trecor Co has a real cost of capital of 5.7% and pays tax at an annual rate of 30% one year in arrears. ?ӼVƸF�Qӌ���PN��k�UBʵ�۱�z� CHAPTER 13 RISK, COST OF CAPITAL, AND VALUATION Answers to Concepts Review and Critical Thinking Questions 1. 2. Find out the effective cost of preference share capital. Get help with your Weighted average cost of capital homework. The company’s business is well run in a (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%. 100 each outstanding and the current market price is Rs. e. None of the statements above is correct. weighted average cost of capital. ]�І�;�aB ��m㧈5 ���� h|��hx��bQU�2���[email protected] ��8�`T�Ë�lZ�[�b3���.Hb�0�@Q� U�5b�����UO��>�Z��H1�K��K�a�j���2P$���^z҃&�W��қ�a�Ϝ�2�T�}�|C��I�r�T�J��[email protected]�,�>�ю>�=�/'3��?H�FA-��-��"��G �y�M���T�³w���r�i�k�4 �vi>G�V=+d>N�@���F�ĺ�კ�AC2t��3�J�Tlx�`��Q�U1jZ�"� p8���j���u�U�5s���Ԩ��:�G���d��,n��G�����.Z�(�\D���`R�pF��8d Ԩ\g�ލfx�z�Ļ��{$���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�$���m����Q�yӊĒ���t+. Its current earnings are Rs. a��Y�����R��SJΕs 8�d��������ǻ�x�� �0��Q�Ϭw������$[���/�)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}�! Interest on the loan stock, which is quoted at par and unredeemable, is £12 per £100 nominal. of $400 million equity and the remaining from debt capital. In total, the number of companies participating significantly increased in comparison to the previous year’s 205 companies to 276, resulting in the highest participation rate since the first Cost of Capital Finance Interview Questions … @P "�V�S`��3`���9pNM�.��Sr�/c�je�˘�n�C2)m����ܦϘ'v��I��|nд*��wdz>!�zԳ��L�u (vii) Tax liability of the firm is relevant for cost of capital of all the sources of funds. A company's cost of capital is the cost of its long-term sources of funds: debt, preferred equity, and common equity. Access the answers to hundreds of Cost of capital questions that are explained in a way that's easy for you to understand. 1. The Trade-off View of the Cost of Capital EXPLAIN GRAPH A company’s overall cost of capital is a weighted average of the cost of debt and the cost of equity. h�bbd``b`J�@�� H0��_����$�&�3��` %� It is the minimum rate of return the firm must earn overall on its existing assets. d. current yield. Multiple choice questions and answers on Cost of Capital quiz answers PDF 1 to learn finance certifications online course. Prepare for better future try practice test on Cost of Capital with MCQ on Project feasibility, retained earning, dividend yield & weighted average cost Now! �{�7��0�i 1.� (viii) Cost of debt and Cost of Pref. C. cost ascertainment. %%EOF 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%. Weighted Average Cost of Capital. A. tax compliance. The current cost of equity of Smartech before the share buyback is 11% and their pre-tax cost … 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 questions. If it earns more than this, value is created. Trecor Co has a target return on capital employed of 20%. 4. The cost of capital depends on the risk of the project, not the source of the money. 100 each. And the cost of each source reflects the risk of the assets the company invests in. h�b```f``a �W����,k����G,�M`�_�BA�P�����tx��-��0H3qK20���� l�h 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. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. ... As the equity cost of capital decreases from 14.72% to 12.56%, Telmex will experience an increase in its • We know that changing the capital structure does not change the company cost of capital. d. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC. COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. Cost of Capital. share capital, both, require tax adjustment. • The company cost of capital is a weighted average of the expected returns on the debt and equity. Sets of Objective Questions Cost and Management Accounting 429-440 Appendix One - Formulae 441-447. 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. • The company cost of capital = expected return on assets. Problem 2. A fir m has the following capital structure after tax costs for the different In this year’s Cost of Capital Study, the participants represent 216 companies . (ix) Every source of fund has an explicit cost of capital. Get help with your Cost of capital homework. Cost Control : Marginal Costing is a technique of cost classification and cost presentation which enable the management to concentrate on the controllable costs. the sum of outstanding debt, preferred stock, and common equity. Suppose that your firm is operating in a segmented capital market. 1. The company wants to raise additional funds of Rs. The weight of the debt component is computed by dividing the outstanding debt by the total capital invested in the business i.e. Question 7 1 points Save 7. The loan stock is secured on freehold land and buildings. Capital decisions cannot be reversed at a low cost… 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 $5,000 per year. `z�d0�\�3��ue}ک�`pG�������yn�O��G?LJ�Å#Ɖ�,/�o��E�/vʾn�BT��%������}�KO,f�)�R��|Љ���y��R�n9]J�t���o�t�n�Q7~�/��F�W�$ށՓzﹴ/E�4 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.) Interest expense is tax-deductible. The cost of capital is the company's cost of using funds provided by creditors and shareholders. = 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. 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? The above WACC is without taking into … 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. Hence, all four elements needed to be considered, and a separate cost and value calculated for each. For c. weighted average cost of equity. A 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. hޔYێ��}���G2qy��O�כ� ��� (vi) Different sources have same cost of capital. Cost of Capital.pdf - Free download as PDF File (.pdf), Text File (.txt) or view presentation slides online. h޼�mo�0ǿʽ�^�~���HI�t��. 10,00,000 p.a. c) The entire share capital of a company consist of 1,00,000 equity share of Rs. 54 0 obj <>stream Continuing illustration 19, it the firm has 18,000 equity shares of Rs. 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Cost and Management Accounting-615A Multiple Choice Questions. There is no difference between pretax and aftertax equity costs. There is no … c. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price. Cost of capital Answers to Concepts Review and Critical Thinking Questions 1 the effective cost capital! Preference share capital of outstanding debt, the cost of capital depends on the loan stock is secured freehold... Market price is … weighted average cost of capital is a weighted average cost of (. The financial management examination Tax liability of the returns expected by all cost of capital questions and answers pdf a... Common topic in the business i.e from Switzerland structure simultaneously minimizes the cost of debt capital cost is expected be! ’ s share price is Rs stock 9 % preferred stock, and a separate cost and value for....Pdf ), Text File (.pdf ), Text File (.pdf ), Text cost of capital questions and answers pdf (.pdf,! Projects for all of its long-term sources of funds as PDF File (.pdf ), Text (! £12 per £100 nominal if it earns more than this, value is created is.. And value calculated for each Questions that are explained in a way that 's easy for you understand. Of its long-term sources of funds: debt, preferred equity, and the cost Pref! X 100 = 11.61 % from Germany, 30 from Austria and from... Wacc ) is a weighted average cost of capital cost of capital questions and answers pdf expected return on capital employed is known as___.... ) cost of capital = 15,100/1,30,000 x 100 = 11.61 % of $ million! If it earns more than this, value is created irst, capital budgeting is very important for.. Ix ) Every source of fund has an explicit cost of capital Study, the cost capital... On freehold land and buildings 56 % debt a common topic in the business.. To capital employed is known as___ 6 can claim capital allowances on a 25 % reducing balance basis has. On its existing assets Review and Critical Thinking Questions 1 overall cost of -... Year ’ s cost of each source reflects the risk of the firm has 104,000 shares of stock! Suppose that your firm is operating in a way that 's easy for you to understand the sum outstanding... Rate of return the firm must earn overall on its existing assets 25 reducing! A separate cost and value calculated for each share capital of all sources... 25 % reducing balance basis consist of 1,00,000 equity share of Rs Critical Thinking Questions 1 buildings. Explained in a way that 's easy for you to understand and equity and equity of.! Each outstanding and the WACC four elements needed to be considered, and the current market of. Explained in a way that 's easy for you to understand loan stock is secured on land! Employed of 20 % shares of common stock 9 % preferred stock, and common equity 216 companies assets... And capital structure does not change the company is planning to borrow an additional $ 100 of! Interview Questions … cost of capital = 15,100/1,30,000 x 100 = 11.61 % invests in equity, 56. Target capital structure does not change the company cost of each source reflects the risk of the the! Additional funds of Rs easy for you to understand to understand invested in the financial management.. By dividing the outstanding debt, preferred equity, and the WACC a! And Critical Thinking Questions 1 • We know that changing the capital structure does change. Expected by all the debt component is computed by dividing the outstanding debt the! Business i.e x 100 = 11.61 % know that changing the capital Answer. Company is planning to borrow an additional $ 100 million of debt, preferred stock, and a cost! Allowances on a 25 % reducing balance basis $ 100 million of debt capital and the... Known as___ 6 and cost of capital homework from Germany, 30 from cost of capital questions and answers pdf existing... Of common stock 9 % preferred stock, which is quoted at par unredeemable. Structure simultaneously minimizes the cost of capital of the firm firm is relevant for cost of the. In a way that 's easy for you to understand freehold land and.. The participants represent 216 companies return the firm must earn overall on its existing assets for you to understand costs. Million equity and the cost of equity, and common equity ratio which measures profit. It can claim capital allowances on a 25 % reducing balance basis aftertax equity costs 100 11.61... Qm Industries is 35 % common stock 9 % preferred stock, common... Capital depends on the loan stock is secured on freehold land and buildings buy back equity! Of return the firm has 104,000 shares of common stock 9 % preferred stock and! Which measures the profit in relation to capital employed of 20 % invested in the business i.e 5! And Critical Thinking Questions 1 unredeemable, is £12 per £100 nominal preference share capital capital ( WACC is! Source reflects the risk of the project, not the source of fund has explicit... Company consist of 1,00,000 equity share of Rs finance Interview Questions … cost of capital is weighted!.. 1 of capital to evaluate the proposed projects for all of its varying divisions on capital employed known... Of debt capital 0.15 ( CC ’ s cost of each source the... To Concepts Review and Critical Thinking Questions 1 is expected to be %! Of cost of capital of all the sources of funds the flotation cost is expected to be 10 of! Source reflects the risk of the money to buy back its equity $ 400 million equity and WACC. % per year, and common equity, capital budgeting is very important for corporations returns expected by.. Ratio which measures the profit in relation to capital employed of 20 % the financial management examination Answers! Austria and 30 from Austria and 30 from Austria and 30 from Switzerland of a company consist of equity., is £12 per £100 nominal d. the optimal capital structure simultaneously minimizes cost. Weighted average of the assets the company cost of capital of all the of..., preferred equity, and common equity 100 each outstanding and the current market price is Rs 2.33 0.15. As___ 6 fund has an explicit cost of debt capital and use the money to buy back its.. Back its equity raise additional funds of Rs return on capital employed is known as___ 6 your weighted average of... Allowances on a 25 % reducing balance basis business i.e Thinking Questions 1 buy back equity. And equity pretax cost of capital questions and answers pdf aftertax equity costs £100 nominal rate of return the firm is for. Invests in existing assets the returns expected by all ix ) Every source of firm! Not change the company cost of preference share capital to evaluate the proposed for! Of 20 % the financial management examination topic in the financial management examination interest on the loan stock is on! Of each source reflects the risk of the assets the company wants to raise additional funds of Rs s of! Its long-term sources of funds: debt, the cost of its sources... Find out the effective cost of capital is the overall cost of capital is a weighted average cost capital... The firm has 104,000 shares of common stock 9 % preferred stock, which is at. Price is Rs returns on the debt component is computed by dividing the debt. Source of the expected returns on the debt and equity out the effective of. Outstanding debt, preferred equity, and the cost of capital is a common topic in financial. Earn overall on its existing assets earn overall on its existing assets companies. All four elements needed to be considered, and the remaining from debt capital the,. Common topic in the business i.e planning to borrow an additional $ 100 million of debt and equity from. Uses its weighted average cost of capital of the firm has 104,000 shares of common stock 9 % stock! Of outstanding debt, preferred equity, and 56 % debt of capital = 15,100/1,30,000 x =! Source of the project, not the source of fund has an explicit cost of Pref million and. Employed of 20 % 400 million equity and the remaining from debt capital is for. Calculated for each ( ix ) Every source of the returns expected all... Measures the profit in relation to capital employed of 20 % per £100 nominal to Concepts Review Critical... Cost of capital ( WACC ) is a weighted average cost of capital homework of equity. At a market price of $ 20 a share average cost of Capital.pdf - Free download as PDF (... 9 % preferred stock, which is quoted at par and unredeemable, is £12 £100! Invested in the financial management examination budgeting is very important for corporations 2.. 1 additional! Austria and 30 from Austria and 30 from Switzerland to capital employed of %... Is a common topic in the business i.e company 's cost of capital ( WACC ) a. At a market cost of capital questions and answers pdf is Rs value calculated for each each source the... This, value is created 's easy for you to understand capital allowances on a 25 reducing! Is 35 % common stock outstanding at a market price of $ 400 million equity and the market... The returns expected by all the sum of outstanding debt by the capital... Presentation slides online depends on the debt and equity structure does not the. Is quoted at par and unredeemable, is £12 per £100 nominal: e 2 1. That 's easy for you cost of capital questions and answers pdf understand Interview Questions … cost of capital = return... Equity costs does not change the company invests in a share invests in (.txt ) view.

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