Financial Mngt

Question 1

Cost of retained earnings

Answer 1

IF common stock is NOT expected to grow, the formula is simply (Dividends/Current S.P.) Everything else is ignored (Flotation costs, underpricing, etc)

Question 2

Using CAPM, required rate of return?

Answer 2

Risk-free rate + Beta (Market -Risk free)

Rf beta mkt risk

Question 3

Cost of Bonds

Answer 3

Need to calculate Interest over proceeds

Interest = Par x coupon rate
Interest x After tax cost (1-tax rate)

Question 4

Dividend YIELD

Answer 4

(Dividends paid/shares outstanding)/market price per share

Question 5

Return on common shareholders’ equity

Answer 5

(Net Income-Preferred Dividends)/Avg common shareholders equity
Avg common shareholders equity - (Total Shareholders equity - Preferred Stock)

Question 6

Reorder Point

Answer 6

Step 1. Daily use - Purchases per year/working days per year
Step 2. Safety Stock - (Max-Min Lead time) x Daily Use
Step 3. (Avg lead time x Daily use) + Safety Stock

Question 7

ROE or income earned per dollar invested

Answer 7

(NI - Preferred dividends) / AVG equity

Question 8

Cost of Preferred Stock

Answer 8

Annual dividend / (S.P. - Underwriter’s Fee)

Question 9

y=a + bx

Answer 9

Y = Dep variable
A = Y-intercept
B = Slope
X = Indep variable

Question 10

Tax savings from depreciation

Answer 10

Calculated as Depreciation x Tax rate