Chapter 3: Weighted Average Cost of Capital

Question 1

Cost of Common Equity 2 approaches

Answer 1

1. Dividend Growth Model
2. Security Market Line (SML) / Capital Asset Pricing Model (CAPM)

Question 2

Rate of return that investors holding shares in a firm required.

Answer 2

Cost of equity

Question 3

The 3 cost of equity

Answer 3

1. Cost of Common Equity (Re)
2. Cost of Debt (Kd)
3. Cost of Preffered Stock (Kp)

Question 4

The formula of getting Common stock (Re) using discounted growth model

Answer 4

Re = (D1 / Po) + g

Question 5

This rate of dividend we promised to the preferred stockholders.

Answer 5

Cost of Preferred Stock

Question 6

The current price of Preffered stock is

Answer 6

Po = d/Kp

Question 7

Formula of getting Kp

Answer 7

Kp = d/Po

Question 8

Is the interest rate collected by the creditors of the fund. It must be cost of debt after tax.

Answer 8

Kd after tax = Kd (1 - t)

Question 9

The formula for the Capital Asset Pricing Model

Answer 9

Re = Rf + B (Rm-Rf)

Question 10

Formula of getting of Risk Premiumq

Answer 10

Rp = Rm - Rf

Question 11

Suppose that Jollibee Foods Corp. is expected to pay a dividend of P0.70 per share next year and average dividend growth is found at 11.06% and current stock price (Po) is P136/share.

What is the Re?

Answer 11

found in Notebook

Question 12

ABC price shares is at P40/share and expects dividend to grow at 5% each year. It paid dividend last year at P4/shares. Determine Re.

Answer 12

Found in notebook

Question 13

The current price of XYZ Company is P300 per share. It will declare and pay dividend at P30 share next year. Average dividend growth is at 5%.

What is the cost of common of equity (Re)?

Answer 13

Found in notebook

Question 14

ABC Company’s historical data on dividends:

2018= P32/share
2019 = P33
2020 = P33.50
2021 = P34.50
2022 = P35

a.) What is dividend growth rate (g)?

Answer 14

Found in notebook

Question 15

ABC Company’s historical data on dividends:

2018= P32/share
2019 = P33
2020 = P33.50
2021 = P34.50
2022 = P35

b.) Assume Po = P400 per share and approved dividends is P35.20 to be distributed the ff. quarter. Find Re on Common Equity.

Answer 15

Found in Notebook

Question 16

Suppose jollibee Foods Corp. is expected to pay dividend of P0.70/share next year and the current price is P136.00/share.

Find Re.

2019= 0.62
2018 = 0.60
2017 = 0.56
2016 = 0.45
2015 = 0.41

Answer 16

Found in Notebook

Question 17

ABC Limited borrowed 200M from Bank D. The interest charged is 8% per year. Find Kd after tax. Tax is 30%.

Answer 17

Found in Notebook

Question 18

In Beta, beyond 1.00 is ______

Answer 18

Risk

Question 19

In Beta, below 1.00 is ________

Answer 19

not risk

Question 20

The current price of the stock is P120 per share. The expected return market is 12%. This portfolio shows a beta of 0.90. The Philippine T-bills is at 4.5%.

Answer 20

Found in notebook

Question 21

The current price of the stock is P120 per share. The expected return market is 12.5%. This portfolio shows a beta of 0.75. The Philippine T-bills is at 3.5%.

Answer 21

found in notebook

Question 22

ABC Limited borrowed 200M from Bank D. The interest charged is 12% per year. Find Kd after tax. Tax is 30%.

Answer 22

Foun in Notebook

Question 23

A 8.5% preferred stock is selling at P155/share. Find the cost of preferred equity. (Assume Par Values is P100).

Answer 23

Found in Notebook

Question 24

The current price of the stock is P380 per share. The expected return on the market is 11.5%. This portfolio shows a beta of 1.22. The Philippine T-bills is at 3.5%.

Compute Re.

Answer 24

Found in Paper

Question 25

ABC Limited borrowed 200M from Bank D. The interest charged is 10.5% per year. Find Kd after tax. Tax is 30%.

Find Kd.

Answer 25

Found in Paper

Question 26

A 12.8% preffered stock is selling at P160/share. Find the cost of preferred equity. (Par Value is P120). Find Kp.

Answer 26

Found in Paper

Question 27

Capital Structure Common Equity P500B, Preferred Equity P100B, and Debt Outstanding is P200B.

Find the WACC using data from 24, 25, & 26.

Answer 27

Found in Paper

Question 28

Capital Structure Common Equity P15M (7.03%), Preferred Equity P5M (3.75%), and Debt Outstanding is P10M (5.6%).

Answer 28

Found in Notebook

Question 29

Problem 1:

1. Sunlight Company’s Price share is at P50 per share. It paid dividend of P4 per share last year and expects that dividends will continue to grow at 3%. Calculate the cost of equity on common stocks (Re).

Answer 29

Found in Paper

Question 30

Problem 1:

2. Sunlight Company borrowed P50M from Bank D. The interest charged is 7.5% per year. Find Kd after tax. Tax is 30%.

Answer 30

Found in Paper

Question 31

Problem 1:

3. A 5% preferred stock is selling at P200/share. Find the cost of preferred equity. Par Value is assumed to be P100 per share.

Answer 31

Fond in Paper

Question 32

Problem 1:

4. Below is the Capital Structure:
   Common Equity: 60M
   Preferred P20M
   Outstanding Debt P20M

Using the Re, Kp, and Ke, computed in 1-3, find the WACC.

Answer 32

Found in Paper

Question 33

Problem 2

An investor is contemplating a stock worth $100 per share today that pays a 3% annual dividend. The stock has a beta compared to the market of 1.3, which means it is riskier than a market portfolio. Also, assume that the risk-free rate is 3% and this investor expects the market price at 8%. An investor is contemplating a stock worth $500 per share today that pays a 3% annual dividend. The stock has a beta compared to the market of 1.25, which means it is riskier than a market portfolio. Also, assume that the risk-free rate is 3.5% and this investor expects the market price at 8%. Compute Re.

Answer 33

Found in paper

Question 34

Compute the average dividend growth rate if the following data are available:

Dividend per share was

2019 = P1.50
2020 = P1.89
2021 = P2.10
2022 = P2.12

Answer 34

Found in Paper

Question 35

Who are you?

Answer 35

A CPA, Lawyer, Doctor, Master degree holder, and has 3 certifications in my belt.