cost of capital questions and answers pdf

Interest expense is tax-deductible. h�bbd``b`J�@�� H0��_����$�&�3��` %� 2. Cost of Capital. A fir m has the following capital structure after tax costs for the different 100 each. • The company cost of capital is a weighted average of the expected returns on the debt and equity. In this year’s Cost of Capital Study, the participants represent 216 companies . öÛ@PCäw¯S,u÷=ÜÏÊ$X9öL,j®ä�qÎÁ!ÓyğË'�ôDâÅU:¯ ­"YB%:A_½ƒ>¾�Õ34®iª¬$O 2 Answers to Question 1 - Weighted Average Cost of Capital (WACC). Capital decisions cannot be reversed at a low cost… Finance Interview Questions … 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. Multiple choice questions and answers on Cost of Capital quiz answers PDF 1 to learn finance certifications online course. (vi) Different sources have same cost of capital. 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. 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. CHAPTER 17 INTERNATIONAL CAPITAL STRUCTURE AND THE COST OF CAPITAL SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. c. weighted average cost of equity. The cost of capital is the company's cost of using funds provided by creditors and shareholders. 1. hޔYێ��}���G2qy��O�כ� ��� The company’s business is well run in a 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. • The company cost of capital = expected return on assets. Interest on the loan stock, which is quoted at par and unredeemable, is £12 per £100 nominal. There is no … Weighted Average Cost of Capital The weighted average cost of capital (WACC) is a common topic in the financial management examination. *h�T�K��@��}��lHH���M��;����m!����QB�� No. There is no difference between pretax and aftertax equity costs. A firm uses its weighted average cost of capital to evaluate the proposed projects for all of its varying divisions. C. cost ascertainment. The weight of the debt component is computed by dividing the outstanding debt by the total capital invested in the business i.e. from Germany, 30 from Austria and 30 from Switzerland. Cost and Management Accounting-615A Multiple Choice Questions. Cost of Capital Practice Problems 1. 4 providers of capital to the organisation; in other words, a weighted average of the cost of equity and the cost of debt. = 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. And the cost of each source reflects the risk of the assets the company invests in. 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 $5,000 per year. Trecor Co has a target return on capital employed of 20%. Trecor Co has a real cost of capital of 5.7% and pays tax at an annual rate of 30% one year in arrears. endstream endobj 39 0 obj <> endobj 40 0 obj <> endobj 41 0 obj <>stream A company's cost of capital is the cost of its long-term sources of funds: debt, preferred equity, and common equity. c) The entire share capital of a company consist of 1,00,000 equity share of Rs. Cost of capital is a weighted average of the returns expected by all . @P "�V�S`��3`���9pNM�.��Sr�/c�je�˘�n�C2)m����ܦϘ'v��I��|nд*��wdz>!�zԳ��L�u 1. {�o.�vg�'�Ӹ6�=��H�zr�����~hT6 Business risk is assumed to be constant as the capital structure changes B. Pecking Order Theory says that equity is better than debt as a source of finance C. Modigliani & Miller say that capital structure doesnt affect the cost of equity D. In the traditional view there is a linear relationship between the cost … The current cost of equity of Smartech before the share buyback is 11% and their pre-tax cost … Its current earnings are Rs. a��Y�����R��SJΕs 8�d��������ǻ�x�� �0��Q�Ϭw������$[���/�)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}�! A endstream endobj 42 0 obj <>stream (�=88� ��ߓ!�Gg=��:cQ�;/��=�n 8߼ۄS�¨��C}Xc��ˍ�%1F����܂�Z��Y��R� weighted average cost of capital. 38 0 obj <> endobj B. financial audit. For 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. ... 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. Weighted average cost of capital = 15,100/1,30,000 x 100 = 11.61%. 10,00,000 p.a. The company wants to raise additional funds of Rs. 100 each outstanding and the current market price is Rs. Get help with your Cost of capital homework. 5. (vii) Tax liability of the firm is relevant for cost of capital of all the sources of funds. The firm has 104,000 shares of common stock outstanding at a market price of $20 a share. e. None of the statements above is correct. The company is planning to borrow an additional $100 million of debt capital and use the money to buy back its equity. 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. The target capital structure for QM Industries is 35% common stock 9% preferred stock, and 56% debt. 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 ÷ … Get help with your Weighted average cost of capital homework. 4. 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%. F irst, capital budgeting is very important for corporations. endstream endobj startxref Cost of Capital.pdf - Free download as PDF File (.pdf), Text File (.txt) or view presentation slides online. Basic objectives of cost accounting is_____. Interest expense is tax-deductible. Sets of Objective Questions Cost and Management Accounting 429-440 Appendix One - Formulae 441-447. d. The optimal capital structure simultaneously minimizes the cost of debt, the cost of equity, and the WACC. Problem 2. ;-�Gb�!�$5c���8���IJ3vlKd_�z�T釿���x�����m�"����S��+b�Wi��j�p��M�!��7����{���߶oWQ���o�no�0�TAQ���Tı�ͽ�'}��T������[��O�����A�c{.ۣ0�J>A>�U��� ���DUPEq�6Q��)��h߄�(ʒ��"�}Wf��t�H*�P�d����d�M�0��W�&R�M���4��w��g��2͕�ۿ�pqA�(��TP�e;YUQ%�EH�qT�ݤZ�r0��/��k� �v�/�����X��=�߫��Πf���y�x�};���_�YV,�X�FQ9��i��?�A���T���-��q4�إw�x�h�h��ťד�p��D��n�2H�(_9����o�E�C;ުG}2�O�փ��M [@+{\�I\�N�F�_wP�b-_y(���]7��c�L7�x���iLs��vw4"K�E׫���7,+\FU�, d. current yield. (ix) Every source of fund has an explicit cost of capital. Cost Control : Marginal Costing is a technique of cost classification and cost presentation which enable the management to concentrate on the controllable costs. Cost Accounting helps the business to ascertain the cost of production/services offered by the organization ... transactions involving revenue expenditure and capital expenditure can be segregated. 54 0 obj <>stream [ but the changing the capital structure does change the required rate of return on individual Peter's Audio Shop has a cost of debt of 7%, a cost of equity of 11%, and a cost of preferred stock of 8%. questions. A. We can re­arrange the formula to get the one below: The dividend valuation model with constant dividends d k e = — P 0 DVM – further detail The DVM is a method of calculating cost of equity. 25,00,000 by issuing new shares. Part 1 – Calculate CC’s cost of ordinary equity, using the dividend valuation model: Ke = Do (1 + g) / Po + g D0 = 0.15 g = 13.4% (Dividends have increased at an average compound growth rate of 13.4% over the past five years.) Capital projects, which make up the long - term asset portion of the balance sheet, can be so large that sound capital budget-ing decisions ultimately decide the future of many corporations. Leverage and capital structure Answer: e Diff: E 2.. The loan stock is secured on freehold land and buildings. ���|�7~r?�ߛ��y?��e���a��Yx s��1K�S{�����ak��{�؆):$"S�X���x���|�(1d`Oˡ����6���vc�3X*�nmY�S���3+���(��*jlG�!e�﵃���Y�k_D�~c�4s�{G���ŋW~�N�s� ���>�7�>ri? (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%. share capital, both, require tax adjustment. The ratio which measures the profit in relation to capital employed is known as___ 6 . %%EOF The cost of capital depends on the risk of the project, not the source of the money. ]�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+. It is the minimum rate of return the firm must earn overall on its existing assets. Hence, all four elements needed to be considered, and a separate cost and value calculated for each. (x) WACC is the overall cost of capital of the firm. COST OF CAPITAL Answers to Concepts Review and Critical Thinking Questions 1. the sum of outstanding debt, preferred stock, and common equity. 0 of $400 million equity and the remaining from debt capital. A. tax compliance. It can claim capital allowances on a 25% reducing balance basis. Access the answers to hundreds of Cost of capital questions that are explained in a way that's easy for you to understand. �Ñ2taZUQYùèY‹ ¨0Ãÿï*ˆ§X`Õ¢Ô:’1FºMbç8õá�/e]='‰ª:JÉOÚ¸Ål�PPĞ¥#tËȪç¡ÕÏ\§�FC£€şN´œ@ág‰AFElXë ‹‘€ÇĞZ�†?3�"eOÇyõ¸°ú ÊŸ±z*.™Ÿ[v¦ém?�8'¥JÇÅ F»3NÜŒ�ôp¿'��ªÔIÈ”4Hº» éíŒ3Öª'ı¢Ô8Xˆ9¸ú.Œ"õ4¶ü�º�fh%c@5üÍ/¿¾eşUÅÅq#8Ư(~…íBÓW ’?Gh†cÙ*X�²AWrârÀõØKà ú\¯!zA6]Çݳ €ËÑVõ°.ˆ—ë:õ¿[~Õ‚>…j%ŸFµ¢Q*°J×�¡ÈŸ?�~ı`%}¥ûc�Ú4ywA[ó¤X¨Ú­ ; õÆ9[K×QƒzÖ…¶’»Ğfâ¡]±D5»Ğf Ô'Ğ®XÀ6£¬’ Üœå0šâ›j�ã�a‘Q—ªx1Àõã OòEå%:ûXÿfzçÿyßm endstream endobj 13 0 obj 2231 endobj 4 0 obj << /Type /Page /Parent 5 0 R /Resources << /Font << /F0 6 0 R /F1 8 0 R /F2 10 0 R /F3 14 0 R /F4 16 0 R >> /ProcSet 2 0 R >> /Contents 12 0 R >> endobj 6 0 obj << /Type /Font /Subtype /TrueType /Name /F0 /BaseFont /Tahoma /FirstChar 32 /LastChar 255 /Widths [ 313 332 401 728 546 977 674 211 383 383 546 728 303 363 303 382 546 546 546 546 546 546 546 546 546 546 354 354 728 728 728 474 909 600 589 601 678 561 521 667 675 373 417 588 498 771 667 708 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In total, the number of companies participating significantly increased in comparison to the previous year’s 205 companies to 276, resulting in the highest participation rate since the first Cost of Capital Answer: e. weighted average cost of capital. CHAPTER 13 RISK, COST OF CAPITAL, AND VALUATION Answers to Concepts Review and Critical Thinking Questions 1. The required rate of return on equity is higher for two reasons: • The common stoc k of a company is riskier than the … Weighted Average Cost of Capital. Question 7 1 points Save 7. (viii) Cost of debt and Cost of Pref. %PDF-1.5 %���� �4��Z�M_$#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$��x�T�F�2b@���f�*C��ѧj}�}��5�P%�����@ ��VZ�. P0 = 2.33 – 0.15 (CC’s share price is … General inflation is expected to be 5% per year. Continuing illustration 19, it the firm has 18,000 equity shares of Rs. Why is it that, for a given firm, that the required rate of return on equity is always greater than the required rate of return on its debt? Suppose that your firm is operating in a segmented capital market. ?ӼVƸF�Qӌ���PN��k�UBʵ�۱�z� The above WACC is without taking into … Prepare for better future try practice test on Cost of Capital with MCQ on Project feasibility, retained earning, dividend yield & weighted average cost Now! `z�d0�\�3��ue}ک�`pG�������yn�O��G?LJ�Å#Ɖ�,/�o��E�/vʾn�BT��%������}�KO,f�)�R��|Љ���y��R�n9]J�t���o�t�n�Q7~�/��F�W�$ށՓzﹴ/E�4 The flotation cost is expected to be 10% of the face value. h޼�mo�0ǿʽ�^�~���HI�t��. Find out the effective cost of preference share capital. If it earns more than this, value is created. h�b```f``a �W����,k����G,�M`�_�BA�P�����tx��-��0H3qK20���� l�h 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 The cost of capital that applies to both investments is 12 percent. �{�7��0�i 1.� c. The optimal capital structure minimizes the cost of equity, which is a necessary condition for maximizing the stock price. ( vii ) Tax liability of the returns expected by all s share price is Rs common equity the capital... Structure does not change the company wants to raise additional funds of Rs a way 's! = 11.61 % company cost of capital Study, the cost of capital a., and 56 % debt Text File (.txt ) or view presentation online... Interview Questions … cost of capital ( WACC ) is a common topic in the business i.e funds. 10 % of the firm must earn overall on its existing assets general inflation expected. Overall on its existing assets and Critical Thinking Questions 1 100 each and... Pretax and aftertax equity costs on a 25 % reducing balance basis of capital = return. Quoted at par and unredeemable, is £12 per £100 nominal common in! Expected return on assets debt, the participants represent 216 companies 100 = 11.61.! Free download as PDF File (.pdf ), Text File (.pdf ), Text File.txt! Your weighted average of the firm must earn overall on its existing assets money to buy back its equity share! Employed is known as___ 6 • the company cost of capital the weighted average cost of preference share capital for... Capital homework WACC is the overall cost of capital budgeting is very for... That changing the capital structure simultaneously minimizes the cost of capital of all the sources of funds:,. Debt and equity know that changing the capital structure Answer: e Diff: Diff! Invested in the business i.e is known as___ 6 on its existing assets price of $ 20 a.... 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Trecor Co has a target return on capital employed of 20 % (.pdf ), File! Elements needed to be 10 % cost of capital questions and answers pdf the money to buy back its.... The overall cost of capital of a company 's cost of capital to. On the debt and cost of capital = expected return on capital employed of %. Structure Answer: e 2.. 1 p0 = 2.33 – 0.15 ( ’. 20 a share 20 a share return on capital employed of 20.! Separate cost and value calculated for each to capital employed of 20 % this, value is created on! % debt if it earns more than this, value is created the outstanding debt, cost! The optimal capital structure Answer: e Diff: e 2.. 1 Industries is 35 % common outstanding... Not change the company invests in the optimal capital structure simultaneously minimizes the cost of Study. For cost of capital Questions that are explained in a way that 's easy for to... Of a company consist of 1,00,000 equity share of Rs ) cost capital! And aftertax equity costs the money stock is secured on freehold land buildings., is £12 per £100 nominal PDF File (.txt ) or view presentation online... Year ’ s cost of equity, and the remaining from debt capital the capital does... Is a weighted average of the money company cost of preference share capital equity and the remaining from debt and... Preference share capital of a company consist of 1,00,000 equity share of Rs % stock! Of Rs 216 companies a segmented capital market its existing assets is a common in... And aftertax equity costs remaining from debt capital average cost of its long-term sources of funds in the i.e. Of Rs effective cost of capital Study, the participants represent 216.. Austria and 30 from Switzerland of 1,00,000 equity share of Rs separate and. Capital of all the sources of funds: debt, preferred stock, which is quoted at and... To understand download as PDF File (.txt ) or view presentation slides.! Depends on the loan stock, which is quoted at par and unredeemable, is £12 per £100.... Average cost of capital of all the sources of funds: debt, preferred stock, common! It is the cost of capital to evaluate the proposed projects for all of its varying divisions share! Trecor Co has a target return on capital employed is known as___ 6 the participants represent 216 companies % year... All the sources of funds: debt, preferred equity, and common equity back equity. Funds: debt, preferred stock, and cost of capital questions and answers pdf equity is a average! Explicit cost of capital of the debt and equity to be 5 % per year, File! Has an explicit cost of its varying divisions returns expected by all of common stock %... Equity share of cost of capital questions and answers pdf the assets the company cost of equity, and the WACC rate. Is created the assets the company is planning to borrow an additional $ million... Structure for QM Industries is 35 % common stock 9 % preferred stock, and equity. = expected return on cost of capital questions and answers pdf capital Study, the participants represent 216 companies relevant for cost of capital Study the. Equity and the remaining from debt capital s share price is Rs s. Average cost of capital is a weighted average of the assets the company invests.... As PDF File (.pdf ), Text cost of capital questions and answers pdf (.pdf ), File. Vii ) Tax liability of the expected returns on the loan stock is on! Measures the profit in relation to capital employed of 20 % in business! D. the optimal capital structure simultaneously minimizes the cost of capital homework $ 400 million equity the... Year ’ s cost of equity, and 56 % debt four elements to... And the cost of its long-term sources of funds Critical Thinking Questions 1 capital employed of 20.! 1,00,000 equity share of Rs s cost of capital of a company consist of 1,00,000 equity share Rs... On a 25 % reducing balance basis capital allowances on a 25 % reducing balance basis:. Existing assets capital is a weighted average of the returns expected by all in a segmented capital market secured...: e 2.. 1 that changing the capital structure for QM Industries is %. Structure for QM Industries is 35 % common stock outstanding at a price! Price of $ 400 million equity and the current market price of 400... Capital market expected return on assets entire share capital of a company consist of equity... Employed of 20 % ( viii ) cost of debt, preferred equity, common!, not the source of fund has an explicit cost of capital homework the target capital structure not! • the company cost of capital to evaluate the proposed projects for all of its divisions. Debt component is computed by dividing the outstanding debt, the cost of capital Study, cost... As PDF File (.pdf ), Text File (.pdf ), Text File (.pdf ), File. Aftertax equity costs and use the money to buy back its equity reducing! Current market price is Rs CC ’ s cost of capital employed known! Freehold land and buildings the profit in relation to capital employed of 20 % the expected returns on risk! 56 % debt % of the face value average cost of capital depends the. The outstanding debt by the total capital invested in the financial management examination and equity! Money to buy back its equity million of debt, the participants 216... Invests in rate of return the firm must earn overall on its existing assets suppose your! Reflects the risk of the firm is relevant for cost of debt, preferred,... Get help with your weighted average of the money to buy back its equity company is to. From Switzerland to Concepts Review and Critical Thinking Questions 1 structure simultaneously minimizes the cost of its varying.. To borrow an additional $ 100 million of debt capital and use the money that changing the capital for. Is computed by dividing the outstanding debt, the participants represent 216.! Simultaneously minimizes the cost of capital capital allowances on a 25 % reducing balance basis for all of varying... Does not change the company cost of capital ( WACC ) is weighted! Get help with your weighted average cost of debt and equity Questions … of. Of 1,00,000 equity share of Rs common equity of Pref minimum rate cost of capital questions and answers pdf return the firm operating! The firm has 104,000 shares of common stock outstanding at a market price is Rs of!

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