Finance

Question 1

What’s the cost of capital formula?

Answer 1

C of C= weighting of debt * after-tax cost of debt + weighting of equity * cost of equity

Question 2

what’s the after tax cost of debt formula?

Answer 2

After tax cost of debt = current debt yield * (1-tax rate)

Question 3

whats the cost of preferred shares formula?

Answer 3

Total annual preferred dividends paid on preferred shares/total mkt value of all preferred shares outstanding

Question 4

How do you calcualte the cost of capital for common shares?

Answer 4

use CAPM formula

Question 5

whats the CAPM formula?

Answer 5

= risk free return (Rf) + Risk premium related to risk of investment
= risk free return (Rf) + Beta (ß) × Market risk premium (RPm)

Question 6

whats the WACC formula?

Answer 6

= D/V (Rd)(1 – T) + P/V (Rp) + E/V (Re)

Question 7

what causes WACC to change?

Answer 7

changes in capital structure

Question 8

What are the 5 stages in the financing life cycle?

Answer 8

1. development
2. commercialization
3. growth
4. maturity
5. decline

Question 9

What financing is used in development phase?

Answer 9

seed money from loved ones

Question 10

what financing is used in commercialization phase?

Answer 10

venture capitalists

Question 11

what financing is used in growth stage?

Answer 11

public or private equity, and maybe debt if company has proven profits

Question 12

what finacning is used in maturity phase?

Answer 12

debt since company has proven track record