Q.1
The next dividend for ABC Limited will be $0.4 per share (D1). Investors require a 10 % return on companies such as ABC Limited. ABC's dividend increases by 3 % every year. Based on the dividend growth model what is the value of ABC Limited shares today? Price to the nearest cent. Do not enter the $ sign
Q.2
A company has annual net operating cash flow (X) of 1.9 million dollars in perpetuity and the market value of its capital (V) is 11.2 million dollars. What is the company's cost of capital ko? Provide your answer as a percentage to two decimal places. Do not enter the % sign.
Q.3
XYZ Corporation has just paid a dividend of 59 cents per share. The current market price of the share is $15 and shareholders require a return of 10 % pa. What is the annual growth rate (g) of the dividends? Answer as a percentage accurate to two decimal places. Do not enter the % sign.
Q.4
The market price of a bond is $1129 (Face Value = 1000). It has 14 years to maturity and pays an annual coupon of $100 in semi-annual installments. What is the effective annual cost of debenture capital before tax (kd)?
7.39%
10.00%
4.21%
8.59%
8.42%
5.00%
Q.5
When using the CAPM to estimate the cost of equity for evaluation of investment proposals, the appropriate substitute for the risk free rate of interest is:
The yield on a 30-year government bond.
The yield on ten year government bonds.
The yield on a government security whose term to maturity matches the life of the proposed project.
The yield on three year government bonds.
The yield on 90 day treasury notes.
Q.6
What is the cost of capital for bank overdraft (kbo). The overdraft rate is 6.1 % pa compounded 12 times a year? Answer as a percentage to two decimal places. Do not enter the % sign.
Q.7
Under what conditions can a company's current capital structure be used to calculate the weights for each source of funds?
When implementing a new project will alter a company's capital structure.
When implementing a new project is not expected to alter a company's target capital structure.
When the current structure reflects the target structure.
When reliable market weights can be obtained.
Only when preference shares are not included in the measure for WACC.
When only book values are available.
Q.8
Under what conditions can a company's current capital structure be used to calculate the weights for each source of funds?
When implementing a new project will alter a company's capital structure.
When implementing a new project is not expected to alter a company's target capital structure.
When the current structure reflects the target structure.
When reliable market weights can be obtained.
Only when preference shares are not included in the measure for WACC.
When only book values are available.
Q.9
Complete the following table by calculating the weighted average cost of capital after tax. The firm can issue debt to the market at the current rate of 10 % pa. The tax rate is 30 %.
|
Funds
|
Cost after Tax %
|
Value in $M
|
Weight %
|
Weighted Cost %
|
|
Equity
|
15% |
30
|
|
|
|
Debt
|
|
15
|
|
|
|
Preference
|
9% |
5
|
|
|
|
Total
|
|
|
|
|
Enter your answers as percentages including the % sign (eg 10%, 3.2%, .9% with no leading zeros, not 0.9%, 15% should be entered as 15% not 15.0%).
Q.10
The 90 day bank bill rate is quoted as 4.9 in the financial press. What is the correct cost of capital kbb to be used in the WACC calculation. Express as a number accurate to four places (to the nearest basis point). Do not enter the % sign (eg 5.5671% should be entered as .0557).
Q.11
The cost of capital of a project:
Depends on the characteristics of the managers of the firm.
Depends on the characteristics of the investors.
Depends on the correlation of the proposed project's cash flows with the cash flows of the firm.
Depends on the business risk of the project.
Depends on the characteristics of the company undertaking the project.
Q.12
If a company with a rating of BBB has on issue debentures paying a coupon rate of 6% pa and the market yield on similar BBB securities is 7% pa, what is the correct cost of debenture capital (kdb), before tax, that the company should use when estimating the WACC using the textbook WACC formula? The riskfree rate is 5% pa.and the Rm is 13% pa.
13%
7%
6%
None of the other given options is correct.
10%
5%
Q.13
Calculate the weighted average cost of preference shares and ordinary shares if there are: 5 million preference shares with market value of $2.50 each and an opportunity cost of 10.8%; 10 million ordinary shares with market value of $4.50 each and an opportunity cost of 16.5%.
None of the given options.
16.2%
16.9%
15.4%
Cannot be calculated.
Q.14
From the following information, calculate the weighted average cost of debt (kd ), before tax. (accurate to two decimal places).
|
Source
|
Market Value ($m)
|
Book Value ($m)
|
Cost of Debt (BT)
|
|
Commercial Bills (kcb)
|
19.8
|
22
|
6.7%
|
|
Bank Overdraft (kbo)
|
5
|
5
|
12.3%
|
|
Bonds (kb)
|
9.2
|
5.5
|
9.8%
|
10.6%
9.60%
8.36%
8.09%
7.2%
Q.15
Calculate the cost of equity capital using CAPM if the risk-free rate of interest is 4 per cent, the return on the market portfolio is 9 per cent, the beta of the firm's assets is .8 and the and beta of equity is 1.2. Provide your answer as a percentage to two decimal places. Do not enter the % sign.
Q.16
Polycorp has a debt equity ratio of 0.8.What is the correct debt ratio D/V that should be used in the WACC formula?
WACC = ke x E/V +kd x (1-t) x D/V
Provide an answer as a decimal accurate to two decimal places eg 60.156% should be entered as .60
Do not enter the % sign.
Q.17
Assume that A limited paid a dividend of 21.3 cents per share just recently. The shares currently sell for $10.1. You also estimate that the dividend will grow steadily at 2.1 % per year into the indefinite future. What is the cost of capital, ke for A limited? Answer as a percentage accurate to two decimal places. Do not enter the % sign.
Q.18
When is the cost of capital for a company as a whole, a valid measure of the cost of capital for an individual project?
When market data are not available.
When it is not practicable to estimate the cost of capital of individual projects.
When the risk of the new project is the same as the risk of the firm's existing projects.
When the CAPM is used as an ex post model.
Never.
Q.19
Given that preference shares have an expected dividend stream of 20 cents in perpetuity and that the current market price (cum-dividend) of the preference shares is $2.40, calculate the cost of capital(kp) of these preference shares.
12%
8.33%
10%
8%
9.09%
Q.20
Under which of the following conditions is it appropriate to estimate a project's cost of capital using the company's cost of capital?
When the systematic risk of a project is similar to that of some other divisions.
When the total risk of the project is the same as the total risk of the firm.
When a company is a diversified conglomerate.
When a company operates in more than one industry but less than five.
When a company operates in a sole industry.
Q.21
Calculate the cost of preference capital (kp) for a non-redeemable preference share which has the following:
Price = $17 and a Preference dividend of $1.6 paid every six months. Your answer should the effective annual cost as a decimal accurate to four decimal places. For example an answer of 12.113% should be entered as .1211 with no % sign.
Q.22
A Limited has just issued a bond with face value of $1000 and a coupon rate of 8%. If the bond has a life of 15 years, pays annual coupons and the YTM is 7.5%, what will the bond sell for?
$1020
$1051
$1162
$957
$1044
Q.23
When calculating WACC trade credit (accounts payable) should not be included as a source of funds.
True
False