İŞLETME FİNANSI II

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.

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.

After-tax kD=kD*(1-T)

After-tax kD=0.10*(1-0.25)= 0.075

After-tax kD=kD*(1-T)

After-tax kD=0.05*(1-0.20)= 0.05 * 0.80= 0.04

All of the statements above are true for cost of equity.

Preferred stockholders have higher claims on the earnings and the assets of the firm, though they have no voting rights.

= 10 / 100 = 0.10

k= 0.05 + (0.10–0.05)*1.25= 0.05 + 0.0625=0.1125

The marginal cost of capital (MCC) is the composite cost of the last dollar of new capital raised.

All of the statements above are true about weighted average cost of capital.

(1.5 +( 1*0.06))/(29-4) =1.56 / 25=0.0624 +0.06 =0.1224