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 Weighted Average Cost of Capital
 

WACC=(wd)*kd*(1-t) + wpskps+ weke

 

Cost of Equity using CAPM:
 

ke=Rf+ β*(Rmkt - Rf)
 

Question :

Tax rate 35%, before tax cost of debt:6.5%, Capital Structure is 50:50 Cost of equity: 10.55%.
 

Ans:
 

WACC= (0.5)*6.5%*(1-0.35) + 0.5*10.55
WACC = 7.4%

 

10 yrs AAA rated bond

8.5%

Expected market return

20%

Beta of market

1.0

Debt/equity ratio

0.8

1 yr market returns

12%

Credit spread (BB bond)

2.17%

Credit rating of XYZ

BB

10 yrs Govt. Bond

7.33%

Beta of a stock XYZ

1.2

Tax rate

40%

Expected dividend

$ 5

Dividends growth

10%

 

Question : Calculate the weighted average cost of capital using above information?

a) 15%     b) 17.5%  c) 20%


Ans:
15%


Question : 
Which of the following will be a fair market price of stock according to Gordon's formula?

a) $25      b) $40      c) $30


Ans:
$40


Question : 
Which of the following is most likely to be true, if there are no outstanding convertible securities?
 

      EPS <= Diluted EPS
 

      EPS => Diluted EPS
 

      EPS = Diluted EPS
 

Ans: EPS = Diluted EPS





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