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- Define each of the following terms: Weighted average cost of capital, WACC; after-tax cost of debt, rd(1 – T); after-tax cost of short-term debt, rstd(1 – T) Cost of preferred stock, rps; cost of common equity (or cost of common stock), rs Target capital structure Flotation cost, F; cost of new external common equity, reQuestion #5. When calculating the weighted average cost of capital (WACC), should we use marketvalues or balance sheet values as the weights of debt and equity? Explain your responseDetermine the formula for EVA. (WACC = Weighted-average cost of capital) After tax operating inc. Current liabilities Market value of debt Market value of equity Operating income Revenues Total assets WACC x ( )) = EVA
- Define each of the following terms:a. Capital; capital structure; optimal capital structureb. Business risk; financial riskc. Financial leverage; operating leverage; operating breakevend. Hamada equation; unlevered betae. Symmetric information; asymmetric informationf. Modigliani-Miller theoriesg. Trade-off theory; signaling theoryh. Reserve borrowing capacity; pecking orderi. Windows of opportunity; net debtIn question C there is a plot of of cost of debt, cost of equity and cost of capital. Can you show how r_a is calculated to be 0.18667? r_d = Cost of debt r_a = cost of capital r_e = Cost of equityWhich of the following is TRUE? I. Internal rate of return (IRR) is a major method for determining the cost of equity. II. The cost of capital depends on the source of the funds. Group of answer choices I and II II only Neither I nor II I only
- Which one of the following formulas is correct? O i) Profit margin = EBIT / Sales ii) ROA = ROE / Equity multiplier %3D O ii) Capital intensity ratio = 1 / Return on assets O iv) Quick ratio = Cash / Current liabilitiesWhich of the following is not a long term source of capital? a. Preferred stock b. Common stock c. Current liabilities. d. Long-term debtA-Rod Manufacturing Company is trying to calculate its cost of capital for use in making a capital budgeting decision. Mr. Jeter, the vice-president of finance, has given you the following information and has asked you to compute the weighted average cost of capital. The company currently has outstanding a bond with a 10.2 percent coupon rate and another bond with an 7.8 percent rate. The firm has been informed by its investment banker that bonds of equal risk and credit rating are now selling to yield 11.1 percent. The common stock has a price of $56 and an expected dividend (D₁) of $1.76 per share. The historical growth pattern (g) for dividends is as follows: $ 1.31 T 1.45 1.60 1.76 The preferred stock is selling at $76 per share and pays a dividend of $7.20 per share. The corporate tax rate is 30 percent. The flotation cost is 2.0 percent of the selling price for preferred stock. The optimum capital structure for the firm is 25 percent debt, 20 percent preferred stock, and 55…
- There are two concepts in respect of working capital Select one: a. None of the options b. Cost of preferred stocks and cost of loans c. Preference share capital and long term assets d. Gross working capital and net working capital e. Cost of bonds and cost of preferred stocksAccording to the "Pecking Order Theory" of capital structure, what is the first preferred source of financing? O A. B. O C. O D. Equity financing Internal financing Preferred share financing Long-term financing O E. Short-term debt financing K42. For the ratio Return on Capital Employed, which of the following best describes capital employed? A. Share capital B. Share capital + reserves C. Share capital + reserves + long-term capital D. Share capital + reserves + long-term capital + current liabilities