WorksheetsUnderstanding Cost of Capital
Total questions: 10
Worksheet time: 8mins
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%
