Understanding Cost of Capital

SK Ltd. issued at par 10,000 10% Preference Shares of Rs. 100 each. These shares are redeemable after 10 years at a premium of Rs. 5 per share. The cost of issue is Rs. 2 per share. Find out the cost of preference capital. Assume 50% tax rate.

• 9.34%

• 10.54%

• 8.54%

• 7.34%

List three factors that can affect a company's Cost of Capital.

• Marketing strategies

• Employee benefits structure

• Market conditions, credit rating, operational risk

• Product pricing models

How does the market risk premium influence the Cost of Equity?

• The market risk premium has no effect on the cost of equity.

• The market risk premium only affects debt costs, not equity.

• A higher market risk premium decreases the cost of equity.

• The market risk premium increases the cost of equity.

What role does the tax rate play in calculating the Cost of Debt?

• The tax rate increases the Cost of Debt by adding extra fees.

• The tax rate reduces the effective Cost of Debt by allowing interest expense deductions.

• The tax rate has no impact on the Cost of Debt calculations.

• The tax rate is only relevant for equity financing, not debt.

What is the significance of the beta coefficient in the CAPM?

• The beta coefficient indicates the asset's risk relative to the market.

• The beta coefficient measures the asset's return on investment.

• The beta coefficient is used to calculate the total market capitalization.

• The beta coefficient indicates the asset's liquidity compared to the market.

What is the impact of interest rates on the Cost of Debt?

• Higher interest rates increase the Cost of Debt.

• Interest rates have no effect on the Cost of Debt.

• Lower interest rates increase the Cost of Debt.

• Interest rates only affect equity financing, not debt.

What does the term 'risk-free rate' refer to in financial models?

• The return on an investment with no risk of financial loss.

• The average return of the stock market over a long period.

• The rate of return on corporate bonds.

• The interest rate charged by banks for loans.

How does a company's credit rating influence its Cost of Capital?

• A higher credit rating generally lowers the Cost of Capital.

• Credit ratings do not affect the Cost of Capital.

• A lower credit rating increases the Cost of Capital.

• Credit ratings only impact equity financing, not debt.

SK Ltd. issued 10,000, 14% debentures of Rs. 100 each at a discount of 5%. The debentures are irredeemable. Cost of issue is 2% and the rate of tax is 50%. Calculate cost of capital before tax.

• 8.685%

• 15.05%

• 7.525%

• 12.980%

SK Company issued 1,000 10% debentures of Rs. 100 each at a premium of 5%, with a maturity period of 10 years. The cost of issue is 2%. The tax rate applicable to the firm is 50%. Find out the cost of capital after tax.

• 3.34%

• 4.63%

• 7.19%

• 8.85%