Name: Regala, Rencel V.

Section and Subject : S-2 Acctg.16

Cost of Capital (Problem)

1. Fair Value (Mrarket) of Preference Share P 240
Underwriting fees (per share) 20
Annual Dividends (per share) 24
Required: Cost of Capital of Preference Share
Solution:
24
=
240-20

= 10.91%

2. Equity P 8,000
Debt 2,000
Cost of Equity 12.5%
Cost of Debt 6%
Tax Rate 30%
Required : Cost of Capital
Solution:
8,000 2,000
= +
8,000 + 2,000 ∗ 12.5% 8,000 + 2,000 ∗ 0.06 ∗ .70
= [0.1 + .0084] ∗ 100
= 10.84%

3. Expected growth rate per year 14%

Fair Value per share P 90.00
Annual Dividend per year 6.20
Floatation Cost per year 24%
Required : Cost of Capital
Solution:
6.20
= + 14%
90 ∗ 76%
= 14.83%

4. A firm has the following capital structure and after-tax costs for the different sources of funds
used:
Source of Funds Annual Proportion After-tax cost
Debt 15,000,000 25% 5%
Preference Shares 12,000,000 20% 10%
Equity Shares 18,000,000 30% 12%
Retained Earnings 15,000,000 25% 11%
 Total 60,000,000
Required : Cost of Capital
Solution:
Debt 25% * 5% = 1.25%
Preference Capital 20% * 10% = 2.00%
Equity Share 30% * 12% = 3.60%
Retained Earnings 25% * 11% = 2.75%
Cost of Capital 9.60%

5. Company A Company B
Market Value of Equity 300,000 500,000
Market Value of Debt 200,000 100,000
Cost of Equity 4% 5%
Cost of Debt 6% 7%%
Tax Rate 35% 35%
Required : Cost of Capital of Company A and Company B

300,000 200,000
= +
300,000 + 200,000 ∗ 4% 300,000 + 200,000 ∗ 0.06 ∗ 0.65

= 3.96%

Cost of Capital (Theories)

1. During planning period, a marginal cost for raising a new debt is classified as
a. debt cost
b. relevant cost
c. borrowing cost
d. embedded cost

Answer B

2. The common stock of a company must provide a higher expected return than the debt of
the same company because
a. there is less demand for stock than for bonds.
b. there is greater demand for stock than for bonds.
c. there is more systematic risk involved for the common stock.
d. there is a market premium required for bonds.

Answer C.
 3. In weighted average cost of capital, a company can affect its capital cost through

a. policy of capital structure

b. policy of dividends
c. policy of investment
d. all of above

Answer D

4. A risk associated with project and way considered by well diversified stockholder is
classified as
a. expected risk
b. beta risk
c. industry risk
d. returning risk

Answer B

5. The cost of equity capital is all of the following EXCEPT:

a. the minimum rate that a firm should earn on the equity-financed part of an investment.
b. a return on the equity-financed portion of an investment that, at worst, leaves the market
price of the stock unchanged.
c. by far the most difficult component cost to estimate.
d. generally lower than the before-tax cost of debt.

Answer D

Working Capital Management (Problem)

Working Capital (Theories)

1. Working Capital requirement is

a. Working capital less short-term debt less cash
b. Inventories plus receivables less payables plus prepayments less accruals
c. Inventories plus receivables less payable
d. Working capital plus short-term debt plus cash

Answer B

2. Which of the following illustrates the use of a hedging (or matching) approach to financing?
a. Short-term assets financed with long-term liabilities
b. Permanent working capital financed with long-term liabilities
 c. Short-term assets financed with equity
d. All assets financed with 50 percent equity, 50 percent long-term debt mixture

Answer B

3. Spontaneous financing includes

a. Accounts receivable
b. Accounts payable
c. Short-term loans
d. A line of credit

Answer B

4. Permanent working capital

a. Varies with seasonal needs
b. Includes fixed assets
c. Is the amount of current assets required to meet a firm’s long-term minimum needs
d. Includes accounts payable

Answer C

5. Networking capital refers to

a. Total assets minus fixed assets
b. Current assets minus current liabilities
c. Current assets minus inventories
d. Currents assets

Answer B