Cost of Capital

Question 1

WACC =

Answer 1

wdrd(1 – t) + wprp + were

Question 2

What is IOS

Answer 2

Investment opportunity schedule (returns to a company’s investment opportunities are generally
believed to decrease as the company makes additional investments)

Question 3

Cost of preferred stock =

Answer 3

dividend / price

Question 4

CAPM. return on equity =

Answer 4

rf + B(market risk premium)

Question 5

Gordon growth model.

re =

Answer 5

D1/p0 + g

Question 6

The ______ method requires using a comparable publicly traded company’s beta and adjusting it for financial leverage differences.

Answer 6

pure-play

Question 7

Country equity risk premium

Answer 7

sovereign risk spread X (annual std of equity index)/(annual std of sov. bond market in dev. country)

Question 8

WACC break point =

Answer 8

$ raised at which the WACC changes/% of capital raised

Question 9

What is a flotation cost?

Answer 9

Offering cost that bankers earn

Question 10

sustainable growth rate g =

Answer 10

(1-D/EPS)ROE

Question 11

how to unlever and relever beta

Answer 11

look up equations