Capital structure

Question 1

What debt has the lowest after-tax cost?

Answer 1

Bonds

Question 2

Weighted cost of capital (WACC) formula?

Answer 2

(cost of equity X % equity in capital structure) + ( weighted average cost of debt X the % debt in capital structure)

Question 3

Capital Asset Pricing Model (CAPM) formula?

Answer 3

Cost of retained earnings = Risk free rate + [ Beta X ( market return - Risk free rate)]

Question 4

CAPM formula

Answer 4

C = R + B (M -R)

Question 5

Cost of equity for capital formula

AKA (DCF)

Answer 5

cost of retained earnings = cost of dividends per share/ Market price per share + Growth rate

Question 6

Cost of preferred stock formula

Answer 6

cost of preferred stock = Preferred stock dividends/ Net proceeds of preferred stock

Question 7

How do you calculate the preferred stock dividends?

Answer 7

Par value X % preferred stock

Question 8

CAPM is used for?

Answer 8

Calculating the required rate of return on retained earnings (equity)

Question 9

Earnings per share is not relevant when?

Answer 9

Determining the risk premium on a specific security.

Question 10

Market rate of interest includes

Answer 10

Risk free rate of interest + inflation premium

Question 11

Beta coefficient measures

Answer 11

non-diversifiable risk in CAPM ; volatility of a stock relative to the market

Question 12

Beta coefficient equation

Answer 12

% change in stock price / % change in market price

Question 13

Net Cost of debt formula

Answer 13

Effective interest rate net of tax

Question 14

Discounted cash flow formula

Answer 14

cost of retained earnings = dividend at end of year / market price + growth

Question 15

How do you calculate the Risk premium if not given

Answer 15

Market return - Risk Free Rate

Question 16

The cost of debt most frequently is measured as

Answer 16

Actual interest rate minus tax savings

Question 17

The cost of capital is the

Answer 17

Rate of return on assets that covers the cost associated with the funds employed

Question 18

How to calculate dividend paid ?

Answer 18

Par value X % dividend

Question 19

After-tax cost of debt equation ?

Answer 19

Pretax cost of debt X ( 1 - tax rate)

Question 20

commercial paper

Answer 20

sold to high creditworthy companies ; generally does not have an active secondary market

Question 21

Commercial paper market

Answer 21

A. avoids the expense of maintaining a compensation balance with a commercial bank

B. Provides a broad distribution for borrowing

C. accrues a benefit to the borrower because its name becomes more widely known.

Question 22

The marketable security with the least default risk is?

Answer 22

U.S Treasury securities

will always return a positive 1% to investor

Question 23

common stock

Answer 23

increases equity while having no effect on debt, thus decreasing debt to equity ratio increase the credit worthiness of the firm

Question 24

Floating bonds maintains

Answer 24

constant market value