İŞLETME FİNANSI II - Deneme Sınavı - 13

Every business requires capital to invest. Therefore, capital is the most important factor of production and the cost of capital is the most significant determinant in investment decisions. The cost of capital is the average cost of the capital mix (the mix of debt and equity in financing decisions). The correct answer is A.

Normally, a business follows a target capital structure, where the percentages of different financing sources are set in an effort to minimize the average cost of capital. The weighted average cost of capital (WACC) is the average cost of the different types of capital employed by the firm. The correct answer is C.

The weighted average cost of capital (WACC) is the average cost of the different types of capital employed by the firm and is measured with the equation below:

where wD is the weight of the debt component and wCE is the weight of the equity component. T is the tax rate and after-tax cost of debt component is calculated by multiplying the before-tax cost of debt (kD) by the tax deductibility. Cost of equity component is denoted as kCE in the above equation. The correct answer is B.

Banks borrow from international bank loans at floating rates and the index is almost always the LIBOR (London Interbank Offered Rate). LIBOR is a benchmark rate that represents the interest rate at which banks offer to lend funds to one another in the international interbank market for short-term loans. LIBOR is an average value of the interestrate which is calculated from estimates submitted by the leading global banks on a daily basis. The correct answer is D.

In bond issues, if the interest rate is floating and not fixed, then it is called as an indexed bond. The index can be any economic indicator but mostly it is a price index, such as the inflation rate, the oil price or the gold price index. The correct answer is E.

Preferred stocks;

However, in preferred stocks, the stockholder receives fixed preferred dividends that are not deductible. The correct answer is D.

The bond-yield-plus-risk-premium approach provides a practical but highly subjective solution to the estimation of the cost of equity. The approach is based upon adding up a risk premium over the firm’s bond yield. Thus, the cost of equity is calculated straightforward by the following simple computation:

k= 0.0845 + 0.0315= 0.1160

According to the bond-yield-plus-risk-premium approach, XLM’s expected cost of equity is 11.60%. The correct answer is C.

Firms may also raise external equity capital by issuing new shares. In this case, the firm will have to incur some flotation (transaction) costs which will eventually raise the cost of equity. In order to adjust the cost of equity to flotation costs, we use the following equation:

where F shows the flotation costs incurred during the issue of the new shares. By incorporating the flotation costs in the model, the rise in the cost of equity after new stock offerings is accounted for. The correct answer is B.

The cost of each capital component is weighed at the proportions in the capital structure to quantify the firm’s WACC.

, where wD is the weight of debt financing in the capital structure, kD is the cost component of debt funds, T is the tax rate, accordingly wPS is the weight of preferred stocks, kPS is its cost component, wCE is the weight of common equity and kCE is the cost of equity capital. Therefore;

WACC=0.20*0.07*(1-0.40)+0.10*0.13+0.40*0.15=0.0814

As it can be seen from the above calculation the WACC for A & B is 8.14%. The correct answer is E.

The cost of each capital component is weighed at the proportions in the capital structure to quantify the firm’s WACC.

, where wD is the weight of debt financing in the capital structure, kD is the cost component of debt funds, T is the tax rate, accordingly wPS is the weight of preferred stocks, kPS is its cost component, wCE is the weight of common equity and kCE is the cost of equity capital. Therefore;

WACC=0.40*0.10*(1-0.35)+0.30*0.20+0.60*0.12=0.1580

As it can be seen from the above calculation the WACC for A & B is 15.80%. The correct answer is A.

Investment refers to all kinds of spendings made to acquire, sustain and increase production factors. The correct answer is A.

Capital expenditure refers to the outlay of funds by the firm that is expected to produce benefits over a period of time longer than one year. The correct answer is B.

Capital budgeting activity is explained as a process, consisting of a number of stages. The three basic steps of this process are:

The correct answer is D.

Relative state of the investments regarding dependence on each other may be one of the following:

The correct answer is E.

Commonly applied capital investment project analysis techniques are payback period, discounted payback period, net present value, internal rate of return, modified internal rate of return, and profitability index. Decision trees are, however, tools to associate probabilities to each possible outcome for an event and map out the possible outcomes and the value of the investment opportunity associated with these different outcomes. The correct answer is C.

Same as payback period, discounted payback period tells the length of time it takes to get the initial cash outflow back, that is the period from the initial cash outflow to the time when the investment project’s cash inflows add up to the initial cash outflow. The only difference is cumulative present values of cash inflows (rather than numerical sum values) will be equal to the initial cash outflow. The correct answer is B.

Tthere are three steps of calculating NPV:

The correct answer is C.

According to internal rate of return technique, if a project is mutually exclusive, the project that provides the highest IRR (that is greater than the expected rate of return (discount rate used in NPV technique)) is approved. The correct answer is A.

Most of the time, because of the nature of risk, making adjustments to cash flows or discount rates is not enough for financial managers. They want to know the sources and possible effects of certain risks of a project. They want to measure a project’s risks coming from various sources rather than in general manner. Sensitivity analysis, scenario and simulation analysis, and decision trees are used for this purpose. However, one or more of these analyses sometimes lead(s) financial managers to consider real options available in a capital investment project because in reality there are various types of uncertainties that exist about these projects. The correct answer is E.

Abandonment options are options to withdraw resources from a project that fails to live up to short-run expectations. These withdrawals might be the entire commitment to a project. With an abandonment option, company obtains an opportunity to withdraw part or all of its commitment to a project. The correct answer is D.