Financial Modeling/Analysis

Question 0

What is the formula for cost of equity (kps)?

Answer 0

kps = Dps / Nps

Dps = cash dividends on preferred stock
Nps = proceeds of preferred stock sale net of fees and costs

Question 1

What is the formula for after-tax cost of debt (kdx)?

Answer 1

kdx = kdt x (1 - Tax rate)

kdt = before-tax cost of debt
(1 - Tax rate) = 1 minus tax rate stated as a decimal

Question 2

What is the formula for cost of common shares (kre) using discounted cash flows (DCF) method?

Answer 2

kre = (D1 / Po) + g

D1 = expected dividend
Po = current stock price
g = constant growth rate in dividends

Question 3

What is the formula for cost of retained earnings (kre) using the Capital Asset Pricing Model (CAPM)?

Answer 3

kre = Risk-free rate + risk premium
kre = krf + (bi x PMR)
kre = krf + [bi x (km - krf)]
krf = risk-free rate of return
bi = Beta coefficient of stock
PMR = market risk premium
Km = market rate

Question 4

How do you calculate weighted average cost of capital (WACC)?

Answer 4

WACC = cost of equity x % equity in capital structure + cost of debt x % debt in capital structure

Question 5

What factors must be known to use discounted cash flow (DCF) valuation method?

Answer 5

1. Dollar amount if initial investment
2. Rate of return desired for the project
3. Dollar amount if future cash inflows and outflows

Question 6

How do you calculate net present value (NPV)?

Answer 6

Discounted cash flows
Less: investment
NPV

Question 7

How do you calculate internal rate of return (IRR)?

Answer 7

IRR computes the percentage rate of return on a specific investment for a comparison to a company’s target (hurdle) rate. IRR produces a NPV equal to zero

Question 8

What is the formula for cost of not using discount (2/10 net 30)?

Answer 8

Discount percent / 100% - discount percent x 365 days / total pay period - discount period
2/10 net 30
2%/100% - 2% x 365 days / 30 days - 10 days = 37.2%