Cost of Debt and Equity

The capital structure is generally composed of the following, EXCEPT

• Bonds

• Private Equity

• Retained Earnings

• Common Shares

In general, the cost of redeemable debt capital could be

estimated using the following methods, EXCEPT

• Debt interest rate

• Yield to maturity

• CAPM

• Leverage ratio

Investors require a return

due to the time value of money and exposure to risk.

• True

• False

Redeemable debt differs from irredeemable debt in term of:

• They do not have a

  redemption date.

• There will be a redemption date when the debt agreement will end.

• Typically issued by governments rather than

  companies.

• They are perpetuity.

The cost of borrowing (the required return on debt) is commonly estimated via:

• CAPM

• Earnings yield basis

• Dividend growth model

• All of the answer given

Which of the following statements is/are correct?

(1)  An increase in the cost of equity leads to a fall in the current share price.

(2)  Investors faced with increased risk will expect increased return as compensation.

(3)  The cost of equity is usually lower than the cost of debt.

• 1 and 2 only

• 1 and 3 only

• 2 only

• 1, 2 and 3

What is the required return on a stock which has a beta of 1.2 if the risk free rate is 2% and the return on the market portfolio is 7%?

• 7%

• 8%

• 9%

• 10%

Which of the following is most likely to lead to REDUCED shareholder wealth?

• Announcement of a higher than expected dividend.

• A decision to invest in a positive NPV project.

• A decrease in the weighted-average cost of capital.

• Adjusting leverage away from the optimal capital structure.

The expansion of CAPM is

• Capital amount pricing model.

• Capital asset pricing model.

• Capital asset printing model.

• Capital amount printing model.

A perpetuity is defined as:

• Equal cash flows at equal intervals of time for a specific number of periods

• Equal cash flows at equal intervals of time forever

• Unequal cash flows at equal intervals of time forever

• None of the answer given