Chapter 11: Cost of Capital

Question 1

Cost of debt

Answer 1

1. Determine Yield
2. adjust for tax (bonds)

Kd (cost of debt) = Y *(1-T (tax rate))

Question 2

Cost of Preferred Stock

Answer 2

Kp = Dp / (Pp - F)

Question 3

Cost of common equity

Answer 3

Dividend valuation approach

CAPM approach
Required return = Rf + beta * ( Expected market retrun - rf)

Question 4

Equity - Cost of retained earnings (internal)

Answer 4

Ke = (D1/Po) + G

Question 5

Equity - Cost of new common stock (external)

Answer 5

Kp = D1 / (Po - F) + g

Question 6

Optimum capital structure:

Answer 6

A capital structure that has the best possible mix of debt, preferred stock, and common equity. The optimum mix should provide the lowest possible cost of capital to the firm.

Calculated decisions required on appropriate weights for.
Debt.
Preferred stock.
Common stock financing.
Capital mix determined by.

Considering present capital structure.
Ascertaining if current position optimal.

Question 7

Financial capital is

Answer 7

bonds
preferred stock
common equity

Question 8

Inflation impact on financial analysis

Answer 8

Revenue stated in current dollars.
Plant, equipment, or inventory may have been purchased at lower price levels.
Profits may be more function of increasing prices than satisfactory performance.