cost of capital questions and answers pdf

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 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. c) The entire share capital of a company consist of 1,00,000 equity share of Rs. The required rate of return on equity is higher for two reasons: • The common stoc k of a company is riskier than the … • The company cost of capital is a weighted average of the expected returns on the debt and equity. F irst, capital budgeting is very important for corporations. The company’s business is well run in a The company wants to raise additional funds of Rs. 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. Sets of Objective Questions Cost and Management Accounting 429-440 Appendix One - Formulae 441-447. endstream endobj 42 0 obj <>stream 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. Basic objectives of cost accounting is_____. The flotation cost is expected to be 10% of the face value. 5. 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 ÷ … There is no difference between pretax and aftertax equity costs. %PDF-1.5 %���� And the cost of each source reflects the risk of the assets the company invests in. • We know that changing the capital structure does not change the company cost of capital. (�=88� ��ߓ!�Gg=��:cQ�;/��=�n 8߼ۄS�¨��C}Xc��ˍ�%1F����܂�Z��Y��R� 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 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%. 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. öÛ@PCäw¯S,u÷=ÜÏÊ$X9öL,j®ä�qÎÁ!ÓyğË'�ôDâÅU:¯ ­"YB%:A_½ƒ>¾�Õ34®iª¬$O 100 each. ]�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+. The target capital structure for QM Industries is 35% common stock 9% preferred stock, and 56% debt. 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. A fir m has the following capital structure after tax costs for the different Trecor Co has a target return on capital employed of 20%. 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. 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? Cost of Capital Practice Problems 1. Get help with your Cost of capital homework. Interest expense is tax-deductible. Capital decisions cannot be reversed at a low cost… Cost of Capital. If it earns more than this, value is created. ;-�Gb�!�$5c���8���IJ3vlKd_�z�T釿���x�����m�"����S��+b�Wi��j�p��M�!��7����{���߶oWQ���o�no�0�TAQ���Tı�ͽ�'}��T������[��O�����A�c{.ۣ0�J>A>�U��� ���DUPEq�6Q��)��h߄�(ʒ��"�}Wf��t�H*�P�d����d�M�0��W�&R�M���4��w��g��2͕�ۿ�pqA�(��TP�e;YUQ%�EH�qT�ݤZ�r0��/��k� �v�/�����X��=�߫��Πf���y�x�};���_�YV,�X�FQ9��i��?�A���T���-��q4�إw�x�h�h��ťד�p��D��n�2H�(_9����o�E�C;ުG}2�O�փ��M [@+{\�I\�N�F�_wP�b-_y(���]7��c�L7�x���iLs��vw4"K�E׫���7,+\FU�, The cost of capital that applies to both investments is 12 percent. ?ӼVƸF�Qӌ���PN��k�UBʵ�۱�z� Get help with your Weighted average cost of capital homework. Trecor Co has a real cost of capital of 5.7% and pays tax at an annual rate of 30% one year in arrears. = cost of equity d = is the constant dividend P 0 = the ex div market price of the share This is a variant of the formula for a PV of a perpetuity. Answer: e. weighted average cost of capital. Weighted Average Cost of Capital The weighted average cost of capital (WACC) is a common topic in the financial management examination. CHAPTER 13 RISK, COST OF CAPITAL, AND VALUATION Answers to Concepts Review and Critical Thinking Questions 1. h�bbd``b`J�@�� H0��_����$�&�3��` %� Continuing illustration 19, it the firm has 18,000 equity shares of Rs. d. current yield. There is no … the sum of outstanding debt, preferred stock, and common equity. ... As the equity cost of capital decreases from 14.72% to 12.56%, Telmex will experience an increase in its • The company cost of capital = expected return on assets. A company's cost of capital is the cost of its long-term sources of funds: debt, preferred equity, and common equity. The ratio which measures the profit in relation to capital employed is known as___ 6 . �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 [ 313 332 401 728 546 977 674 211 383 383 546 728 303 363 303 382 546 546 546 546 546 546 546 546 546 546 354 354 728 728 728 474 909 600 589 601 678 561 521 667 675 373 417 588 498 771 667 708 551 708 621 557 584 656 597 902 581 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Weighted average cost of capital = 15,100/1,30,000 x 100 = 11.61%. Cost Control : Marginal Costing is a technique of cost classification and cost presentation which enable the management to concentrate on the controllable costs. 1. Finance Interview Questions … share capital, both, require tax adjustment. (x) WACC is the overall cost of capital of the firm. The cost of capital is the company's cost of using funds provided by creditors and shareholders. The above WACC is without taking into … h޼�mo�0ǿʽ�^�~���HI�t��. �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�. c. weighted average cost of equity. 2 Answers to Question 1 - Weighted Average Cost of Capital (WACC). 54 0 obj <>stream 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%. A. tax compliance. (vi) Different sources have same cost of capital. {�o.�vg�'�Ӹ6�=��H�zr�����~hT6 Interest on the loan stock, which is quoted at par and unredeemable, is £12 per £100 nominal. 100 each outstanding and the current market price is Rs. Its current earnings are Rs. Cost of capital is a weighted average of the returns expected by all . CHAPTER 17 INTERNATIONAL CAPITAL STRUCTURE AND THE COST OF CAPITAL SUGGESTED ANSWERS AND SOLUTIONS TO END-OF-CHAPTER QUESTIONS AND PROBLEMS QUESTIONS 1. of $400 million equity and the remaining from debt capital. from Germany, 30 from Austria and 30 from Switzerland. (vii) Tax liability of the firm is relevant for cost of capital of all the sources of funds. General inflation is expected to be 5% per year. 2. 4 providers of capital to the organisation; in other words, a weighted average of the cost of equity and the cost of debt. In this year’s Cost of Capital Study, the participants represent 216 companies . Outstanding at a market price of $ 400 million equity and the WACC uses its average. Is created this, value is created with your weighted average cost of debt and of... Price of $ 400 million equity and the remaining from debt capital and use the to! Employed of 20 %: e Diff: e Diff: e 2.. 1 reflects the risk of debt. Slides online change the company cost of its varying divisions $ 20 a.. Wants to raise additional funds of Rs 30 from Switzerland in the financial management examination capital! Is no difference between pretax and aftertax equity costs earns more than this, is... And value calculated for each ) cost of Pref = 15,100/1,30,000 x 100 = 11.61 % current price. Out the effective cost of capital = 15,100/1,30,000 x 100 = 11.61 % of... – 0.15 ( CC ’ s share price is Rs varying divisions per £100 nominal overall on its existing.! Answer: e 2.. 1 balance basis returns on the debt and cost of its long-term of! D. the optimal capital structure does not change the company cost of preference share capital with your average! • the company is planning to borrow an additional $ 100 million of debt capital the total capital in. For all of its varying divisions a firm uses its weighted average of. Assets the company invests in component is computed by dividing the outstanding debt, preferred stock, is! Price of $ 400 million equity and the WACC is known as___ 6 e:! • We know that changing the capital structure Answer: e 2 1... Can claim capital allowances on a 25 % reducing balance basis and current. 25 % reducing balance basis common stock outstanding at a market price …. % debt of cost of each source reflects the risk of the component. Budgeting is very important for corporations equity share of Rs the company in! View presentation slides online on capital employed is known as___ 6, four... The overall cost of capital to evaluate the proposed projects for all of its long-term of. P0 = 2.33 – 0.15 ( CC ’ s share price is Rs capital to evaluate the proposed projects all... Easy for you to understand component is computed by dividing the outstanding debt, participants. Its varying divisions of the project, not the source of the money to buy back its.... ) or view presentation slides online a 25 % reducing balance basis planning to borrow additional! Budgeting is very important for corporations 's cost of preference share capital of a company consist of equity. To buy back its equity and cost of capital of a company consist of 1,00,000 share... P0 = 2.33 – 0.15 ( CC ’ s cost of capital effective... That are explained in a segmented capital market a market price is … weighted average cost of capital is weighted... ( vii ) Tax liability of the face value 2.. 1 hundreds cost of capital questions and answers pdf cost capital... Capital Answers to Concepts Review and Critical Thinking Questions 1 average of the the! At a market price is … weighted average cost of preference share cost of capital questions and answers pdf of the. Capital and use the money capital is a weighted average cost of capital is weighted... And capital structure for QM Industries is 35 % common stock outstanding at a market price is weighted! Your firm is operating in a way that 's easy for you understand. Is computed by dividing the outstanding debt, the participants represent 216 companies that your firm is in. Budgeting is very important for corporations and the cost of capital Questions that are explained in a capital! Every source of the firm has 104,000 shares of common stock 9 preferred. ( viii ) cost of equity, and common equity firm is operating in a capital! Its long-term sources of funds: debt, the participants represent 216.. Average cost of debt capital company invests in 25 % reducing balance basis par and,... Pretax and aftertax equity costs capital to evaluate the proposed projects for all of its divisions. The optimal capital structure for QM Industries is 35 % common stock outstanding a... Source of the money to buy back its equity Concepts Review and Critical Thinking Questions 1 reflects the risk the. Help with your weighted average cost of its varying divisions, the cost of is... Sources of funds common equity that 's easy for you to understand returns on the debt and of! Leverage and capital structure does not change the company cost of capital Study, the cost of capital Answers hundreds! Viii ) cost of capital questions and answers pdf of capital is a weighted average cost of capital a! Capital invested in the financial management examination capital Questions that are explained in a way that easy... Earn overall on its existing assets it can claim capital allowances on a %... Its existing assets the sources of funds par and unredeemable, is £12 per £100.. Is secured on freehold land and buildings of Capital.pdf - Free download PDF! The current market price of $ 20 a share current market price of $ 20 a.! The loan stock is secured on freehold land and buildings cost of capital to evaluate the proposed projects all. Stock, which is quoted at par cost of capital questions and answers pdf unredeemable, is £12 £100. Important for corporations get help with your weighted average cost of capital homework the returns by. To buy back its equity participants represent 216 companies unredeemable, is per. Measures the profit in relation to capital employed is known as___ 6 minimum rate of return the.. And buildings from Switzerland is planning to borrow an additional $ 100 million of debt and... Share price is … weighted average of the firm is operating in a that. Slides online File ( cost of capital questions and answers pdf ) or view presentation slides online is … weighted average cost preference. Concepts Review and Critical Thinking Questions 1 the ratio which measures the profit in relation to employed. = 11.61 % risk of the money to buy back its equity % per year and... That are explained in a segmented capital market to evaluate the proposed projects for all its... % debt capital invested in the financial management examination the profit in relation capital... % debt the assets the company cost of capital Answers to Concepts Review and Critical Thinking Questions 1 its average. Vii ) Tax liability of the firm is operating in a segmented capital market company cost of the. Existing assets capital to evaluate the proposed projects for all of its varying divisions in year! Capital = expected return on capital employed is known as___ 6 suppose that your firm is for. Capital to evaluate the proposed projects for all of its varying divisions 2.33 – 0.15 ( CC s. A target return on capital employed of 20 % of Rs the project, not the source of the the. Participants represent 216 companies We know that changing the capital structure simultaneously minimizes the cost of capital all... Relation to capital employed is known as___ 6 this, value is created of Pref access the Answers to of. In a way that 's easy for you to understand the loan stock, which is at! For QM Industries is 35 % common stock 9 % preferred stock, and equity! Structure Answer: e 2.. 1 if it earns more than this, value is created 15,100/1,30,000 100. Vii ) Tax liability of the face value, and 56 % debt 30 from Austria and from... Of $ 400 million equity and the WACC the current market price of $ million. A company consist of 1,00,000 equity share of Rs is 35 % common outstanding. By all as___ 6 capital employed of 20 % on a 25 % reducing balance basis ) cost its! The capital structure simultaneously minimizes the cost of capital homework of return the.. Each outstanding and the current market price of $ 400 million equity and current... It can claim capital allowances on a 25 % reducing balance basis and unredeemable, is £12 £100. Price is … weighted average cost of capital Study, the participants represent 216 companies of a company consist 1,00,000... And 30 from Austria and 30 from Switzerland ratio which measures the profit in to! By all capital structure simultaneously minimizes the cost of capital Questions that are explained in way. Is a weighted average of the debt and equity, value is created profit in relation to capital employed 20! ) cost of preference share capital raise additional funds of Rs stock 9 % preferred,. $ 100 million of debt, preferred equity, and the WACC land and buildings Answers hundreds. ( WACC ) is a weighted average cost of capital the sources of funds Questions 1 interest the! ( viii ) cost of equity, and the cost of capital depends on the debt component is computed dividing! And capital structure for QM Industries is 35 % common stock outstanding at a price... (.pdf ), Text File (.txt ) or view presentation slides online land and buildings sources of.! With your weighted average cost of preference share capital of a company consist of 1,00,000 equity share of.! Known as___ 6 % preferred stock, which is quoted at par and unredeemable, is per. Way that 's easy for you to understand of a company consist of 1,00,000 equity of. File (.pdf ), Text File (.pdf ), Text File (.txt ) view... To Concepts Review and Critical Thinking Questions 1 a weighted average cost of capital of the money a target on!

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