COST OF CAPITAL

A firm should use .............. when evaluating an investment

• the least costly source of financing

• the most costly source of financing

• the weighted average cost of all financing sources

• the current opportunity cost

A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can

• increase the proportion of long term debt to decrease the cost of capital

• increase the proportion of short term debt to decrease the cost of capital

• decrease the proportion of common stock equity to decrease financial risk

• increase the proportion of common stock equity to decrease financial risk

Choose the right statement from the following:

• Cost of debt is always higher than cost of equity

• Cost of debt is always lower than cost of equity

• Cost of debt can be higher or lower than cost of equity

• When company doesn't pay dividend, the cost of equity is zero

A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5%. The cost of the firm's commonstock equity is

• 5%

• 8%

• 10%

• 13%

The Capital Structure of a company means

• the proportion between LT debt and equity

• the proportion between liability and equity

• the proportion between liability and total asset

• the proportion between ST debt + LT debt and equity

Cost of capital can be divided into three item except;

• Cost of debt

• Cost of preferred share

• Cost of investment

• Cost of common share

Y Ltd. issues 14% prefernce shares of face value of Rs.100 each whch realizes Rs.92 per share for the company. The shares are repayable after 12 years at par. Calcualate the cost of preference shares.

The market price of equity shares of NG Ltd. is Rs.140. If annual dividend expected by the investors is Rs.30 per share, determine the cost of capital.

The market price of equity shares of a comapny is Rs.150. The comapny had paid a dividend of Rs.30 last year. The investors expect a growth of 5% in dividend every year. Clacualte the cost of equity capital.