İŞLETME FİNANSI II - Deneme Sınavı - 3

The weighted average cost of capital (WACC) is the average cost of the different types of capital employed by the firm. Where wD is the weight of the debt component, 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 E.

In the DCF (discounted cash flow) equation, CFo is the cash inflow from the financing source at t=0, CFt is the cash outflow at time to the investors. The cash outflows can be interest or coupon payments, principal repayments and dividend payments according to the capital component employed. The cost of the capital component is denoted by k, which is the discount rate in the above equation. The correct answer is A.

The correct answer is C.

$500,000*0.96= $480,000

The coupon payments are: $500,000*0.05= $25,000

The before-tax cost of the bonds is calculated from the equation below:

k= 0.056349
After-tax k= 0.056349*(1-0.35) = 0.036627

The correct answer is A.

Where kps is the component cost of preferred stocks, Dps shows the fixed dividend payments and Pps the price of the security. The above equation is derived from the perpetuity valuation model with fixed cash flows for an infinite time period. The correct answer is B.

PRS retains 40% of its net income, thus the expected growth rate is 6.40% when calculated from the retention growth model. Hence, the cost of equity is 11.32%. The correct answer is D.

As it can be seen from the above calculation the WACC for LDP is 11.46%. The correct answer is E.

The correct answer is B.

• Debt is not an ownership interest in the firm. Creditors do not generally have voting power.

• The corporation’s payment of interest on debt is considered a cost of doing business and is fully tax deductible. Dividends paid to stockholders are not tax deductible.

• Unpaid debt is a liability of the firm. If it is not paid, the creditors can legally claim the assets of the firm. This action can result in liquidation or reorganization, two of the possible consequences of bankruptcy. Thus, one of the costs of issuing debt is the possibility of financial failure. This possibility does not arise when equity is issued.

The correct answer is C.

• Retained earnings are most useful to expansion and diversification of the business activities.

• Retained earnings are one of the least costly sources of finance since it does not involve any floatation cost as in the case of raising funds by issuing different types of securities.

• If the companies use equity finance they have to pay a dividend. Instead, if the companies use debt finance, they have to pay interest. However, if the company uses retained earnings as sources of finance, they need not pay any fixed obligation regarding the payment of dividend or interest.

• Retained earnings allow the financial structure to remain completely flexible. The company need not raise loans for further requirements if it has retained earnings.

• When the company uses the retained earnings as the sources of finance for their financial requirements, the cost of capital is very cheaper than the other sources of finance. Hence the value of the share will increase.

• Retained earnings provide opportunities for evasion of excessive tax in a company when it has a small number of shareholders.

The correct answer is D.