## LOS 46b Calculate the component costs of 1 debt 2 preferred stock 3 retained earnings three different methods and 4

The after-tax cost of debt, kd(I - t), is used in computing the WACC. It is the interest rate at which firms can issue new debt (kd) net of the tax savings from the tax-deductibility of interest (kdt). after-tax cost of debt interest rate - tax savings kd - kd(t) kd(l - t) after-tax cost of debt kd (1 - t) Dexter, Inc., is planning to issue new debt at an interest rate of 8 percent. Dexter has a 40 percent marginal federal-plus-state tax rate. What is Dexter's cost of debt capital Professor's...

## Exam Flashbacks

Required CFA Institute Disclaimer Due to CFA curriculum changes from year to year, published sample exam questions and guideline answers prior to the current year may not reflect the current curriculum. Source Question 90 from '99, '00, '01, '02, '03 sample exams. An analyst gathered the following information about a common stock Annual dividend per share 2.10 Risk free rate 7 If the annual dividend is expected to remain at 2.10, the value of the stock is closest to Source Question 85 from '94...

## Concept Checkers Efficient Capital Markets

The two major tests employed to test the weak-form efficient market hypothesis EMH are A. event studies and runs tests. B. autocorrelation tests and runs tests. C. event studies and performance tests. D. time-series tests and cross-sectional tests. 2. Which of the following forms of the EMH assumes that no group of investors has monopolistic access to relevant information D. Both weak and semistrong form. 3. The strong-form EMH asserts that stock prices fully reflect which of the following...

## Concept Checkers Organization and Functioning of Securities Markets

A well-functioning market will B. provide timely and accurate information. C. have good internal and external efficiency. 3. New shares of firms already trading on the exchange are called 4. Which of the following is NOT a characteristic of a well-functioning market D. Lowest possible transaction costs. 5. To be traded on the over-the-counter markets, a stock must have D. 1 million publicly held shares. 6. The sale of shares between two investors is called D. the over-the-counter market. 7....

## Concept Checkers An Introduction to Security Valuation

Which of the following describes the flow of the top-down valuation process A. Economic analysis, industry analysis, company analysis. B. Company analysis, industry analysis, economic analysis. C. Economic analysis, company analysis, industry analysis. D. Pick the best stocks regardless of the industry and economic conditions. 2. An analyst used the infinite period valuation model to determine that XYZ Corporation should be valued at 20. The current market price is 30. The analyst should do...

## Concept Checkers Capital Structure and Leverage

Business risk is NOT affected by 2. Which of the following choices is a key determinant of operating leverage C. The competitive nature of the business. D. The trade-off between fixed and variable costs. 3. Which of the following statements is TRUE The optimal capital structure A. minimizes the weighted average cost of capital WACC and maximizes the share price. B. minimizes the cost of equity and maximizes the WACC. C. minimizes the cost of debt, the cost of equity, and the WACC. D. is...

## Concept Checkers Dividend Policy

Under the residual dividend model, firms would do all of the following EXCEPT A. determine their optimal capital budgets. B. borrow money to maintain the dividend payout schedule. C. determine the amount of equity needed to meet the capital budget. D. pay dividends only if more earnings are available than needed to support the optimal capital budget. 2. Which of the following statements about dividends is TRUE A. Dividend irrelevance means that investors prefer dividends to capital gains. B....

## R 7 r r r

1 IRR 1 IRR 2 1 IRR 1 IRR 1 IRR 5 IRR-based decision Since IRR 10.1 lt WACC 11.5 , Jayco should reject the project. Remember, the NPV and IRR decision rules always give the same decision for an independent project. The procedure for computing NPV using a TI BAII Plus calculator is presented in Figure 7. Figure 7 Calculating IRR With the TI Business Analyst II Plus Figure 7 Calculating IRR With the TI Business Analyst II Plus Given the projects cash flows, we calculate the payback period as...

## Suppose Jayco Wants To Replace An Existing Printer With A New High

Decision Since NPV gt 0, Jayco should accept the expansion project. The procedure for computing NPV using the TI BAII Plus and HP12C calculators is presented in Figures 2 and 3, respectively. Figure 2 Calculating NPV With the TI Business Analyst II Plus Figure 2 Calculating NPV With the TI Business Analyst II Plus Figure 3 Calculating NPV With the HP12C Figure 3 Calculating NPV With the HP12C 52,000 - gt CHS - gt g - CF0 Professor's Note The LOS does not ask you to make a decision based on IRR...

## Concept Checkers Cash Flow Estimation and Other Topics in Capital Budgeting

When evaluating a new project, the firm should NOT consider which of the following factors A. Changes in working capital attributable to the project. B. The depreciation expense shield on the new project. C. The current market value of any equipment to be replaced. D. Previous expenditures on market research to determine the feasibility of the project. 2. Which of the following is NOT a cash flow that results from the decision to accept a project D. Shipping and installation costs. 3. Which...

## Concept Checkers The Cost of Capital

A company has 5 million in debt outstanding with a coupon rate of 12 percent. Currently the yield to maturity YTM on these bonds is 14 percent. If the firm's tax rate is 40 percent, what is the company's after-tax cost of debt 2. The cost of preferred stock is equal to A. the preferred stock dividend divided by its par value. B. the preferred stock dividend multiplied by the net market price. C. 1 - tax rate times the preferred stock dividend divided by the net price . D. the preferred stock...