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WorksheetsCost of Capital
Total questions: 125
Worksheet time: 1hrs 2mins
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 company Weigthed average cost of capital includes:
The company capital structure
The company capital structure & cost of capital
The company cost of capital
The company financing sources
The company cost of debt under market value approach can be calculated using:
The balance or record by financial expenses and total debt
The CAPM model
The YTM (Yield to Maturity) rate of each bond issued by the company, and the bond value
The coupon rate of each bond issued by the company, and the bond value
A greater tax rate will affect company cost of debt (Kd) in the sense that:
The effective cost of debt will be higher
The effective cost of debt will be lower
What does reflect for a company their cost of capital?
(a)
When a company decides financing the major of their operating with debt rather than equity, the company is
High levered
Low levered
Mid-levered
Non-levered
A company will prefer:
Really, the WACC rate for a company isn't relevant
A low WACC rate
A high WACC rate
Commonly if a company is classified as a SME (Small and Medium Enterprise), the company must consider:
A lower return to the equity-holders in comparison with a return that would be expected over a large company.
The same return to the equity holders that would be expected over a large company.
The company cost of debt (Kd) because it influence the company cost of equity (Ke)
A higher return to the equity-holders in comparison with a return that would be expected over a large company.
The country risk premium (CRP) is measured mainly considering:
The continent where the country is located.
The country's 'debt quality'
The country president effectiveness
The flows of foreign capital
When the result of company D/E ratio (Debt to equity ratio) is greater than 1, it indicates:
A low risk level of company capital structure
A high risk level of company capital structure
A low risk level of company cost of capital
A high risk level of company 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.
(a)
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.
(a)
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.
(a)
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.
(a)
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.
(a)
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.
(a)
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.
(a)
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.
(a)
Beta represents ............. Risk.
Systematic Risk
Unsystematic Risk
Total Risk
Default Risk
From the following information calculate expected return from XYZ Ltd.- Risk free rate is 5 % , Market return is 10% and Beta value is 0.5 of XYZ Ltd.
5%
7.5%
10%
15%
From the following information you have to calculate Risk Premium.
Risk free rate is 10%, market return is 15% and beta is 1.5.
5%
17.5%
15%
10%
From the following information find out that stock is over performer or under performer .
Rf is 5%, market Return is 10% , beta is 0.5 and actual return is 10%.
Over performer
Under performer
A "More risky " common stock would have a "beta"
Equal to Zero
More then one
Less then One
Equal to One
According to the capital-asset pricing model (CAPM), a security's expected return is equal to the risk-free rate plus a premium
equal to the security's beta.
based on the unsystematic risk of the security.
based on the total risk of the security.
based on the systematic risk of the security.
If a security plots below the security market line, it is:
ignoring all of the security's specific risk
underpriced, a situation that should be temporary
offering too little return to justify its risk
a defensive security, which expects to offer lower returns
What is the beta of a U.S. Treasury bill?
1.0
−1.0
0
Unknown
Which one of these statements is correct?
Betas can be measured exactly.
If a stock has a very low beta, it is likely to have a high beta in the future
The expected future risk premium is easy to accurately determine
CAPM is widely used as a means of estimating expected returns
What would happen to the after tax cost of debt if there is an increase in the corporate tax rate:
will increase
will decrease
will remain the same
Which of these sources of financing have the highest priority in case of financial trouble:
bonds
preferred stocks
common stocks
In order to calculate Weighted Average Cost of weights may be based on:
Market values
Book values
Both
None
Correct cost of capital helps in the following decision making :
Evaluation of Investment options
Financing Decision
Designing of optimum credit policy
All the three
Five years ago, sona Limited issued 12 % irredeemable debentures at Rs. 103, at Rs. 3 premium to their par value of Rs. 100. The current market price of these debentures is Rs. 94. If the company pays corporate tax at a rate of 35 %, calculate its current cost of debenture capital ?
7.57 %
8.30 %
12 %
None of these
A company issued 10,000, 10% Debentures of Rs. 100 each on 1.4.2020 to be matured on 1.4.2025. The company wants to know the current cost of its existing debt and the market price of the debenture is Rs. 80. Compute the cost of existing debenture assuming 35 % tax rate using NPV Method or IRR Method
Around 12.21 %
Around 14.21 %
Around 9.21 %
None of these
RBML is proposing to sell a 5 years bond of Rs. 5000 at 8 % of interest p.a. The bond amount will be amortised equally over its life. Calculate the bond’s present value for an investor if he expects a minimum rate of return of 6 % ?
Approx Rs. 5226
Approx Rs. 5263
Approx Rs. 5622
None of these
RBML is proposing to sell a 5 years bond of Rs. 5000 at 8 % of interest p.a. The bond amount will be amortised equally over its life. Calculate the bond’s present value for an investor if he expects a minimum rate of return of 6 % ?
Approx Rs. 5226
Approx Rs. 5263
Approx Rs. 5622
None of these
Calculate the cost of equity capital of H Ltd, whose risk free rate of return equals 10 %. The firm’s beta equals 1.75 and the return on the market portfolio equals to 15 % .
17.875 %
18.75 %
15.75 %
None of these
Cost of equity of a company is 20 %. Rate of floatation cost is 5 %. Rate of personal income tax is 30 %. Calculate cost of retain earning ?
21 %
26 %
14.7 %
13.3 %
Which of the following is not an assumption of the Capital Asset Pricing Model (CAPM)
The Capital Market is efficient
Investors lend or borrow at a risk free rate of return
Investors do not have the same expectations about the risk and return
Investor’s decisions are based on a single time period
What does this represent?
Cash flow
Business Activity
Working capital cycle
Liquidity cycle
Sufficient working capital is needed to prevent a business from becoming insolvent.
True
False
Not sure
Which of the following could be turned into cash the easiest or quickest?
Raw materials
Finished product
Semi-finished product
None of these
A company with more current assets has a low level of liquidity and therefore is low risk.
NOT SURE
A company that use more current liabilities will have higher level of liquidity as well as its profitability.
NOT SURE
The cheapest source of finance is
Equity Shares
Preference Shares
Retained Earnings
Debentures
Net Woking capital refers to
Total current Assets
Current Asset + Current Liabilities
Current Assets - Current Liabilities
Current Liabilities - Current Assets
A fixed assets of business firm should be financed through :
Long term liability
Short term Liability
A Mix of long term and short term liability
A Mix of long term and short term liability None of the above
Which of the following is NOT true of working capital?
It is the amount of capital the firm has available to pay for its operations
The amount of money a firm has to spend in the short term
It is a measure of the firm's liquidity
It is the sum total of a firm's fixed assets
One way a firm can shorten the working capital cycle is:
Reduce the amount of debt
Decrease the amount of current assets
Increase the amount of time customers have to pay on credit
Reduce the amount of time customers have to pay on credit
The longer the working capital cycle takes to complete, the _____________ working capital a firm will need.
Less
More
NOT SURE
NEITHER MORE NOR LESS
The basic objectives of Working Capital Management are :
Optimum utilization of resources for profitability.
To meet day to day current obligations
Ensuring marginal return on current assets is always more than cost of capital
Select any one of the above statement.
The proportion of debt in the overall capital is also called __________
Capital Structure
Financial Leverage
Trading On equity
Cost of funds
If return on investment is 10 % and rate of interest is 12% then which source of fund should be used for maximizing shareholder's wealth.
Debt
Equity
BOTH THE ABOVE
NONE OF THESE
Which component of capital structure determines the financial risk?
Equity
Debt
Retained Earnings
NONE OF THESE
A higher level of sales will require a higher level of working capital.
NOT SURE
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
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.
(a)
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.
(a)
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.
(a)
Assume that ABC Corporation has the following capital structure: 30 percent debt,10 percent preferred stock, and 60 percent common stock. ABC Corporation wishes to maintain these proportions as it raises new funds. Its before-tax cost of debt is 8 percent, its cost of preferred stock is 10 percent, and its cost of equity is 15 percent.
If the company’s marginal tax rate is 40 percent, what is ABC’s weighted average cost of capital?
12.30%
11.44%
10.44%
13.78%
Jorge Ricard, a fi nancial analyst, is estimating the costs of capital for the Zeale Corporation. In the process of this estimation, Ricard has estimated the before-tax
costs of capital for Zeale’s debt and equity as 4 percent and 6 percent, respectively. What are the after-tax costs of debt and equity if Zeale’s marginal tax rate is 30 percent?
6%
7%
8%
9%
Jorge Ricard, a fi nancial analyst, is estimating the costs of capital for the Zeale Corporation. In the process of this estimation, Ricard has estimated the before-tax
costs of capital for Zeale’s debt and equity as 4 percent and 6 percent, respectively. What are the after-tax costs of debt and equity if Zeale’s marginal tax rate is 30 percent?
6%
7%
8%
9%
The cost of equity for a firm:
tends to remain static for firms with increasing levels of risk.
increases as the unsystematic risk of the firm increases.
ignores the firm's risks when that cost is based on the dividend growth model.
equals the risk-free rate plus the market risk premium.
The dividend growth model:
is only as reliable as the estimated rate of growth
can only be used if historical dividend information is available.
considers the risk that future dividends may vary from their estimated values.
applies only when a firm is currently paying dividends.
If a firm uses its WACC as the discount rate for all of the projects it undertakes then the firm will tend to:
I. reject some positive net present value projects.
II. accept some negative net present value projects.
III. favor high risk projects over low risk projects.
IV. increase its overall level of risk over time.
I and III only
III and IV only
I, II, and III only
I, II, III, and IV
Chelsea Fashions is expected to pay an annual dividend of $0.80 a share next year. The market price of the stock is $22.40 and the growth rate is 5 percent. What is the firm's cost of equity?
7.58 percent
7.91 percent
8.24 percent
8.57 percent
Sweet Treats common stock is currently priced at $19.06 a share. The company just paid $1.15 per share as its annual dividend. The dividends have been increasing by 2.5 percent annually and are expected to continue doing the same. What is this firm's cost of equity?
6.03 percent
6.18 percent
8.47 percent
8.68 percent
XYZ Co. is currently being traded at $5 per share and just announced a dividend of $0.50 per share, which will be paid out next year. Using historical information, an analyst estimated the dividend growth rate of XYZ Co. to be 2%. What is the cost of equity?
11%
12%
13%
14%
A company has paid a dividend of 10c for many years.
The company expects to continue paying dividends at this level in the future.
The company’s current share price is $1.50.
Calculate the cost of equity.
6%
7.66%
6.67%
7.77%
P Co has just paid a dividend of 10c.
Shareholders expect dividends to grow at 7% pa. P Co’s current share price is $2.05 ex div.
Calculate the cost of equity of P Co.
11.21%
3.1%
10%
12.21%
Cost of capital is
Lesser than the cost of debt capital.
Equal to the last dividend paid to the equity shareholders.
Equal to the dividend expectations of equity shareholders for the coming year.
None of the above.
The cost of capital has three elements, EXCEPT
Risk-free rate of return
Premium for Business Risk
Premium for Financial Risk
Dividend Valuation Model (DVM)
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
A company with more current assets has a low level of liquidity and therefore is low risk.
NOT SURE
Net Woking capital refers to
Total current Assets
Current Asset + Current Liabilities
Current Assets - Current Liabilities
Current Liabilities - Current Assets
The cheapest source of finance is
Equity Shares
Preference Shares
Retained Earnings
Debentures
A fixed assets of business firm should be financed through :
Long term liability
Short term Liability
A Mix of long term and short term liability
A Mix of long term and short term liability None of the above
One way a firm can shorten the working capital cycle is:
Reduce the amount of debt
Decrease the amount of current assets
Increase the amount of time customers have to pay on credit
Reduce the amount of time customers have to pay on credit
The average of a firm's cost of equity and after tax cost of debt that is weighted based on the firm's capital structure is called the:
weighted capital gains rate.
structured cost of capital.
subjective cost of capital
weighted average cost of capital.
Basic objective of Financial Management is
Maximization of profit.
Maximization of share holder's wealth
Ensuring Financial discipline in the firm.
All of these.
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
The cost of common stock equity is
The cost of guarantedd stated dividend expected by the stockholders
The rate at which investor discount the expected dividends of the firm to determine its share value
the after tax cost of the interest obligations
the historical cost of floating the stock issue
A firm has a beta of 1.2. The market return equals 14% and the risk free rate of return equals 6%. The estimated cost of common stock equity is
6%
7.2%
14%
15.6%
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 cost of debt can be estimated by
Calculating Yield to Maturity of the company's obligation
The interest company needs to pay for its equity
Using Capital Asset Pricing Model
Asking the CFO
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
What will be the condition that an investment is considered as feasible:
The Average Annual Investment Return should be higher than the cost of capital
The cost of capital should be higher than the average annual investment return
The internal Rate of Return (IRR) should lower than the cost of capital
The internal Rate of Return is higher than the Net Present Value
Cost of capital refers to the opportunity cost of making a specific investment.
True
False
Cost of capital can be divided into three item except;
Cost of debt
Cost of preferred share
Cost of investment
Cost of common share
Bond is the example of preference share.
False
True
Formula of cost of preference share is
Kps = PPS/DPS
Kps = DPS/PPS
Example of the uncontrollable factors is:
Firm operating and investment policy
Firm dividend policy
Interest rate
Capital structure policy
Below are all the types of project risks except:
Stand alone risk
Corporate risk
Market risk
Dividend risk
ABC Ltd. issues 12 % debentures of face value of Rs.100 each and realizeds Rs.95 per debenture for the comapny. It is redeemable after 10 years at 10% Premium. The company comes under 50% corporate tax. Calculte cost of debt.
(a)
Five years ago, sona Limited issued 12 % irredeemable debentures at Rs. 103, at Rs. 3 premium to their par value of Rs. 100. The current market price of these debentures is Rs. 94. If the company pays corporate tax at a rate of 35 %, calculate its current cost of debenture capital ?
(a)
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.
(a)
The following information availble from the balance sheet of a company;
Equity share capital (20,000 shares of 10 each) Rs. 2,00,000
Reserves and Surplus - Rs. 1,30,000
8% Debentures - Rs. 1,70,000
The rate of tax of the compnay is 50%. Current level of the equity dividend is 12%. Calcualate the WACC
(a)
The cost of equity of a comapny is 20%. The persoal incometax rate is 30%. Assuming that dividend received is subject to tax and the cost of investment incuding brokerage is 2%. Determine the cost of retained earnings
(a)
Biaya modal (Cost Of Capital) adalah
biaya yang harus dikeluarkan atau dibayar oleh perusahaan untuk mendapatkan modal yang digunakan untuk hutang perusahaan lain
biaya yang harus dikeluarkan atau dibayar oleh perusahaan untuk mendapatkan modal yang digunakan untuk investasi perusahaan
biaya yang harus dikeluarkan atau dibayar oleh perusahaan untuk mendapatkan hutang jangka pendek
biaya yang harus dikeluarkan atau dibayar oleh perusahaan untuk mendapatkan hutang jangka panjang
For preference shares, the dividend rate can be considered as its ..... .
Value
Cost
Price
None of Above
Preference shareholder has a preferential right over :
Dividend
Repayment of money in Winding up
Both of the above
None of the above
DP , means :
Dividend Per share
Division Rate
None of the above
Flotation Cost is taken by whom :
Shareholder
Company
None of the above
Flotation Cost is taken by whom :
Shareholder
Company
None of the above
●Cost of Irredeemable preference shares
= (KP)=DP /...
GP
NP
TP
AT
●The formula will be as follows :
= Kd = I /NP ........ .
(1 – R)
(1 – W)
(1 – P)
(1 – N)
Debt are calculated on the basis ...... .
Profit before taxes
Profit after taxes
Net Profit
All of the above
Fill the compete formula . Cost of Irredeemable Debenture
( Kd ) = I (1- t).
........
GP
NP
TP
DT
Cost of capital is the ....... of funds used for financing a business
Value
Cost
Price
None of the above
