WorksheetsCost of capital
Total questions: 10
Worksheet time: 5mins
What term is not related to cost of capital?
rate of return
market value of the firm
financial statements
investments/
projects
Choose the incorrect statement regarding cost of capital
It takes business risk and financial risk into consideration
Capital structure of a company consist of mixture between debt and equity
Cost of capital must be able to maintain the firm’s market value
Maximum required rate of return to offset the effect of risk associated with business
Choose the correct statement regarding bond
The interest rate paid to bondholders is higher than loan
Cost of bond is more expensive than cost of equity
Bond is paid when due and for agreed period of time
The company will repay the investors when the bonds reach its maturity date
In a capital structure of a company, equity consists of _____ (choose more than one answer)
common stocks
bond
retained earnings
preferred stocks
Two assumptions of dividen valuation model are _____ (choose two answers)
constant dividends
fluctuate dividends
dividends grow at constant rate semi annually
dividends grow at constant rate annually
For bond, the cost of debt is equal to the (a)
Choose the incorrect statement
Borrowing money or issuing bonds to raise capital can change the capital structure unless the firm can increase the equity as well
Book value is the accounting value of assets less its liabilities
Breakpoints is the total financing that can be achieved before the firm is forced to sell new debt or equity capital
WACC reflects the expected average future cost of capital over the short run.
Assume that Jack Corporation maintains mix of 35 % debt, 15 % preferred stock and 50 % common stock. The firm pays tax of 40 %. The costs of various types of finance are as follows:
Bonds: 9.5 % (before tax)
Preferred stock: 15.8 %
Common stock: 23.0 %
Determine the firm’s WACC.
(a)
All of the following statements are correct regarding cost of debt EXCEPT
Before-tax cost of debt is often taken as the total interest on the loan
Cost of debt is also refer to the before-tax cost of debt
Cost of debt is also refer to the after-tax cost of debt
Payment of interest on loan is tax deductible
If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the
return on the stock minus the risk-free rate
difference between the return on the market and the risk-free rate.
beta times the market risk premium.
beta times the risk-free rate.
