Cost of Capital

Question 1

Cost of Capital

lower or higher than rate of return?

Answer 1

lower

Question 2

Liability
Equity

What do they earn?

Answer 2

Liability - interest
Equity - dividends

Question 3

What value and rate to use?

Answer 3

Market Valuever Book Value
Effective Rate over Nominal Rate

Question 4

How to know if discount/premium?

Answer 4

Effective > Nominal = Discount
Net Proceeds > Face Amount = Premium

Question 5

Formula for WACC

Debt
Preferred Stock
Common Stock

Answer 5

Debt
- weight x (yield rate * (1 - tax rate))

Preferred Stock
- weight x yield rate

Common Stock
- weight x (yield rate + growth rate)

Question 6

Which of the ff is net of flotation costs?

Cost of Preferred Stock
Cost of Common Stock
Cost of Retained Earnings

Answer 6

Cost of Preferred Stock - ✓
Cost of Common Stock - ✓
Cost of Retained Earnings - X

Question 7

Diversifiable Risk

Answer 7

Controllable risk
Unsystematic
Business risk, liquidity risk, default risk

Question 8

Nondiversifiable Risk

Answer 8

Market-related risk
Interest rate risk, purchasing power risk