Module 1: Capital Structure

Question 1

Cost of Capital (R) or Return formula

Answer 1

R=(D/P) +g

g = the constant rate of growth in dividends
D = dividend per share expected @ year end
P = current market value or price of the o/s common stock

Question 2

WACC

Answer 2

WACC = cost of equity x % equity in capital structure + weighted avg cost of debt x the percentage debt in capital structure

Question 3

Cost of preferred stock

Answer 3

Preferred stock dividends (Par x Rate)/Net proceeds of preferred stock

Question 4

Cost of Asset Pricing Model (CAPM)

Answer 4

Cost of retained earnings formula =
risk free rate + risk premium
= risk free rate + (beta x market risk premium)
= risk free rate + [beta x (market return - risk free rate)]

Question 5

Weighted average interest rate =

Answer 5

Effect annual int. pmt./debt outstanding

Question 6

Expected Rate of Return

Answer 6

= Annual dividends/current market price