Ratios - Section 3A

Question 1

Cost of New Common Stock ISSUE

Answer 1

(Dividend Next Year / Current Price per Share (1-Flotation)) + Growth Rate

Question 2

Cost of Common Equity

Answer 2

(Dividend/Price) + Growth Rate

Question 3

Cost of Funds - Retained Earnings

Answer 3

(Dividend Next Year / Current Mkt Price per Share) + Growth Rate

Question 3

Costs of Preferred Stock

Answer 3

(Par Value per Share x Dividend Rate) / Net Proceeds

OR

Interest Payment / Net Issue Price

Net Proceeds = Sell Price Less Issuing Costs

Question 5

Investors Required Rate of Return

Answer 5

Current share price = Next Year Dividend/(RoR - Dividend Growth Rate)

RoR=Rate of Return

Question 6

Degree of Financial Leverage

Answer 6

% Change of Net Income / % Change of Op Income

EBIT is also Op Income

Question 7

After Tax Cost of Bond

Answer 7

(Interest/Bond Sell Price) x (1-Tax Rate)

Question 8

Cost of Funds - Common Stock

Answer 8

(Dividends Next Year / (Current Price per Share – Under Price – Flotation Cost) ) + Dividend Growth Rate

Question 8

Net Cost of Debt

Answer 8

Effective Interest Rate x (1 - Tax Rate)

Question 10

Market Rate of Interest

Answer 10

Risk Free Interest Rate + Inflation Rate