BEC - Ratios and Calculations

Question 1

Effective Interest Rate (BEC B1 - M4)

sometimes also called Annual Percentage Rate or APR

Answer 1

= (Actual Interest Charge - Additional Interest Earned (off the required balance) / (Total Loan - Additional Required Balance)

To summarize: (Finance Charge) / (Loan Proceeds)

Question 2

A borrowing is in the form of a discounted note. Company borrows 100K at 9% stated interest rate. What is effective interest rate?

Answer 2

100K * 9% = 9K interest charge (at the beginning - discount)
91K = therefore net proceeds of loan

Finance charge / Loan Proceeds = 9/91 = 8.89%

Question 3

What is CAPM?

Answer 3

Cost of Equity = Risk Free Rate + Beta (Market rate - risk free rate)

Question 4

How do we calculate the current net after-tax cost of debt?

Answer 4

Cost of Debt = (Risk Free Rate + (Basis Points / US Treasury Bond Rate)) * Net of Income Taxes

Key - one basis point = 1% of 1%