Module 11 - Capital Structure

Question 1

Equation for Cost of Equity

Answer 1

Ke = (D(1+g) / P) + g

D = current dividend 
P = share price (ex div)
g = growth rate

Question 2

Equation for Cost of Irredeemable Debt

Answer 2

Kd = (I(1-t) / MV)

Question 3

What is WACC

Answer 3

Weighed average cost of capital

Question 4

WACC equation

Answer 4

WAXC = (%d x Kd) + (%e x Ke)

Question 5

Equation for Gearing

Answer 5

Debt / Equity

Question 6

MM Cost of equity (No tax)

Answer 6

Kg = Ku + ((Ku - Kd) x (D/E))

Kd = gross (before tax) cost of debt

Ku = cost of equity in ungeared firm

D = market value of debt

E = market value of equity

Question 7

MM Cost of equity (with tax)

Answer 7

Kg = Ku + ((Ku - Kd) x (D/E) x (1-t))

Kd = gross (before tax) cost of debt

Ku = cost of equity in ungeared firm

D = book / market value of debt

E = book / market value of equity

t = corporation tax

Question 8

Market Value ex-interest

Answer 8

MV ex-interest = MV cum-interest - interest

Question 9

Second WACC calculation? Not sure what it means

Answer 9

Page 200 in notes

Question 10

Is the cost of equity the same as the shareholders required rate of return?

Answer 10

Yes

r = ((D(1+g) / P) + g

Ke = ((D(1+g) / P) + g

Question 11

Ex dividend price of a share

/

Value of a share

Answer 11

P = (D(1+g) / (r-g))

D = dividend per share

g = dividend growth rate

r = shareholders required rate of return