3.17 COST OF CAPITAL

Question 1

What is the Cost of debt (bonds) formula?

Answer 1

yield X (1- effective tax rate)

Question 2

What is the Cost of preferred stock formula?

Answer 2

dividend / net issue price

Question 3

What is the Cost of existing common stock formula?

Answer 3

CAPM = risk free interest/market rate + ((expected market rate - risk free rate) X Beta)

Question 4

1. Beta >1
2. Beta <1
3. Beta =1

Answer 4

1. super volatile/risky than the average market (more return)
2. less volatile/risky than the average market (less return)
3. beta is average

Question 5

what types of debt investments have tax benefits?

1. bonds (yes/no?)
2. dividends (yes/no?)
3. preferred stock (yes/no?)

Answer 5

1. yes
2. no
3. no