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WorksheetsCost of capital
Total questions: 20
Worksheet time: 3hrs 20mins
When evaluating an investment, which option should a firm choose to maximize its benefits?
the least costly source of financing
the most costly source of financing
the weighted average cost of all financing sources
the current opportunity cost
Out of Mira, Ananya, and Sanya, which student would prefer:
Really, the WACC rate for a company isn't relevant
Mira would prefer a low WACC rate
A high WACC rate
Commonly if a company is classified as a SME (Small and Medium Enterprise), what must the company 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 influences 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.
Which financing source should a firm 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
Hey Rahul, Mira, and Aanya! Let's make this financial risk premium question more engaging. Imagine a corporation that wants to decrease its financial risk premium. What can the firm do to achieve this?
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
Three friends, Aisha, Ria, and Aashi, are discussing a firm's common stock. The firm's common stock has a market price of $25 per share and is expected to pay a dividend of $2 per share at the end of the coming year. The dividends have been growing at a rate of 5%. Now, they are curious to know the cost of the firm's common stock equity. Can you help them find out?
5%
8%
10%
13%
Myra, Aarush, and Tisha are evaluating an investment. What should they consider when making their decision?
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 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.
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%
Siya, Avani, and Shaan are discussing the dividend growth model. They want to know:
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 the cost of equity for Sweet Treats?
6.03 percent
6.18 percent
8.47 percent
8.68 percent
Arnav, Aarush, and Kabir are avid investors in XYZ Co. They are excited about the company's current share price of $5 and the upcoming dividend of $0.50 per share. Based on historical data, an analyst estimated the dividend growth rate of XYZ Co. to be 2%. Now, they are curious to know the cost of equity for XYZ Co. 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%
What is the main objective of Financial Management according to Divya, Naira, and Aisha?
Maximization of profit.
Maximization of shareholder's wealth.
Ensuring Financial discipline in the firm.
All of these.
Cost of capital is what?
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.
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
