BEC - Q8

Question 1

Calculate cost of common owner’s equity

Answer 1

The cost of common equity is calculated by dividing the expected next dividend by the current stock price and adding the results to the expected growth rate in earnings.

Eg. The stock of Fargo Co. is selling for $85. The next annual dividend is expected to be $4.25 and is expected to grow at a rate of 7%. The corporate tax rate is 30%. What percentage represents the firm’s cost of common equity?

Question 2

Theoretically, the proceeds from the sale of a bond will be equal to

Answer 2

The present value of the principal amount due at the end of the life of the bond plus the present value of the interest payments made during the life of the bond, each discounted at the prevailing market rate of interest.

This answer is correct. Theoretically, market price (proceeds) of an obligation is equal to the present value of all future cash flows (i.e., the time value of money is considered). A bond has two sets of cash flows: periodic interest payments and the principal amount due at the end of the life of the bond. Such cash flows would be discounted at the prevailing market rate of interest at the time of the bond’s issuance.

RMCB-0042

Question 3

Marginal cost

Answer 3

The additional cost of producing one more unit.

Subtract the total cost of the previous unit from the total cost of the last unit.

Question 4

Degree of operating leverage

Answer 4

Percentage change in operating profit / percentage change in sales volume

Question 5

Employee numbers have all numeric characters. To prevent the input of alphabetic characters, what technique should be used?

Answer 5

Field format check

Question 6

Calculate payback period

Answer 6

Initial investment / annual cash flow

Question 7

Economic order quantity model minimizes what?

Answer 7

The sum of ordering and carrying costs