marginal cost of capital in financial management

Answer: (A) NOPAT ÷ Ko, Question 45. = 6% Ke= Shareholder's required rate of return. WACC = 1,377.5 = 13.775% The calculation of the IRR is explained in Topic 8. Since the yield on debentures of similar maturity and risk class is 1696, the company would be required to offer debenture at discount.

(D) Ke = 18.94%; Kr = 15.15% The beta of the company is 1.1785. Answer:

Security Analysis 9. Marginal Cost of Capital Purely Domestic Firm MNC Financing . (B) Preference dividend × (1 – t) Marginal cost of capital is the weighted average cost of the last dollar of new capital raised by a company. (A) Component cost

Cost of debt is 10% (before tax) up to ₹ 2,00,000 and 13% (before tax) beyond that. % of equity = 100 -36.53 = 63.47 (D) Both Statements are true. Kd = I(1 -t) (D) is the required return on the total assets of a firm. Found inside – Page 489weighted-average cost of capital (WACC)—a synonym for “cost of capital” emphasizing the method by which it is ... measure of the marginal cost of capital funds target capital structure—the percentage mix of financing sources management ... (B) Adjusted Price Method The cost of retained earnings after making adjustment for income tax and brokerage cost payable by the shareholders can be determined according to the following formula: Kr= Required rate of return on retained earnings. What is your best estimate of Nikon’s cost of equity? Answer: 61.-----is the weighted average cost of capital. This implies that the overall cost of capital employed by Aero Ltd is 13%. Capital Budgeting 3. 0000000016 00000 n 10,80,000 p.a selling costs `4.50 p.u.Fixed Selling costs ` 5,04,000 per year. = 300 = 0.1020 i.e. The Company has 5,000 shares of 7% preferred stock outstanding at a price of ₹ 58 a share. The debt capital will be raised through term loans.

(D) 8.57 per cent, Question 52. (A) 14.6% Yield-to-maturity (YTM) on the debt is 8.0396. The overall cost of capital is called as – WACC = 1,146.67/100 = 11.47% It will carry an interest rate of 9.5% for the first ₹ 100 million and 10% for the next ₹ 50 million. 1. The marginal cost of capital is the cost to raise one additional dollar of new capital from each of these sources. Found inside – Page 530... equity and uses only internally generated equity (retained earnings), the marginal cost of each new dollar of capital will be minimized. So internally generated equity is available for financing a certain amount of new investment; ... Partnership Firm Registration Procedure, Time, Checklist, Documents Required | How to Register a Partnership Firm? (A) Term structure The expected dividend per share in next year is 5096 of the 2019 EPS.

Calculate the cost of long-term debt, preference shares, ordinary shares, retained earnings and new issues of ordinary shares. Answer: (D) [Preference dividend ÷ Net pro-ceeds] × (1 – t) Found inside – Page 143(b) Weighted Av er age Cost of Capital us ing Market Value Weights Market Sources Weighted Value (`) Proportion Cost ... A schedule showing the relationship between additional financing and the WACC is called the weighted marginal cost ... = 7 + 0.9 (15 – 7) (A) varies inversely with its cost of debt. (C) Operating and financing decisions Which of the following model/ method makes use of Beta (β) in the calculation of the cost of equity? (D) All of the above The corporate tax rate is 35%. Z Ltd. is planning for the issue of 15% Debentures of ₹ 100 each, redeemable at par after 5 years. The dividend Yield Method cannot be used to calculate the cost of equity of units suffering losses. (A), Question 5. Kd =? Which of the following is the correct formula to calculate the cost of equity under the dividend yield method? 0000000870 00000 n (A) ₹ 57,950 = 0.07 i.e. The applicable income tax rate for the company is 3596. (C) 11.57% Cost of 9.5% debt: The dividends have been increasing by 2.5% annually and are expected to continue doing the same. the cost of capital. (D) 9.12% Answer: Recommended Articles As more and more funds are required by the firm, the cost of each component of the capital structure may increase. Financial Management MCQs: Multiple Choice Questions and Answers (Quiz & Practice Tests with Answer Key) PDF, Financial Management Worksheets & Quick Study Guide covers exam review worksheets for problem solving with 750 solved MCQs. Explain and calculate the weighted average cost of capital (WACC) and discuss alternative weighting schemes that can be used to calculate the WACC. Weighted average cost of capital (WACC) 13. (D) All of the above, Question 9. = 15% Answer: (C) 15% The corporate tax rate is 30%. Answer: (B) is unaffected by changes in the tax rate. 8 Following is used as tool for Cost Control (a) Marginal cost (b) Historical cost (c) Standard cost (d) All of the above 9 Management accounting assists the management (a) Only in control (b) Only in direction (c) Only in planning (d) In planning, direction and control 10 Management accounting is deals with - (a) Quantitative Information Hint: (A) Discounted cash flow (DCF) method You must also pay attention to the cost of retained earnings. Answer: Analysis assumes that the salvage value for a decommissioned gas combined cycle or coal asset is equivalent to its decommissioning and site restoration costs. (B) Future Cost Marginal cost of capital 14. (D) Decrease the capital structure (C) Asset Seller What is the discount rate applicable to Division A? (B) Level of interest rates Students should practice Cost of Capital – CS Executive Financial and Strategic Management MCQ Questions with Answers based on the latest syllabus. Answer: (C) Weighted cost of capital (A) ₹ 57,950, Question 65. Answer: (C) 7% & 7.14%, Question 90. Dividend Payout Ratio 25% Answer: Hint: (B) ₹ 57,590 Calculate cost of equity and cost of retained earnings? This dividend is expected to increase by 3 percent annually. Marginal cost c. Composite cost d. Any of these. You must also be able to explain what preference share “dividends” are and how they are generally stated. Key sources of value (earning an (A) Preference dividend ÷ Net proceeds, Question 33. Weight Average Cost of Capital here is 13% (0.13*100). Demonstrate how the WMCC and IOS can be jointly applied to make financing and investment decisions. For example, if an entity issues a bond and the yield-to-maturity for a similar bond is 10%, then the before-tax cost of the bond issued can be estimated to be 10% as well.

(B) 12.65% Method 1: In the beginning of the chapter, the computation of the weighted (marginal) cost of capital was based on the assumption that the firm would get equity funds only from internal sources, that all debt had a single cost, and that all preferred stock had a single cost. Answer: (B) 11% 7.14% Cost of 10% debt = 9.6% Difference Between A Research Paper And A Review Paper, FMA 101 Financial Management TOPIC 7 – The Cost of Capital, FMA 101 Financial Management Assessment Answers, FMA 101 Financial Management TOPIC 6 – Risk and Return, FMA 101 Financial Management TOPIC 8 – Capital Budgeting Techniques. Price of common stock. (B) 10.01% (III) Cost of capital helps to evaluate the financial performance of the firm. (A) Issue price = 486.75; Kd = 12.10% WACC= 1,061.74/100 = 10.62% Answer: (A) Risk-Adjusted Discount Model

Found inside – Page 14-11A schedule or graph showing the relationship between additional financing and the weighted average cost of capital is called the weighted marginal cost of capital schedule . Determining the Weighted Marginal Cost of Capital Schedule The ... These incremental changes are most correctly referred to as: the weighted average cost of capital. An alternative method is known as the yield-to-maturity (YTM) method. Answer: (B) 9.10% Answer: If, for example, a 12% debt is issued with a selling price = R1 100 and the total issuing costs = R100, then the net proceeds from issuing the debt equals R1 000 (R1 100 – R100). Found inside – Page 61Cost of debt and cost of equity each rise as financial leverage increases ; however , WACC falls with early additions of debt because of the averaging of high - cost equity and low - cost debt . The Marginal Cost of Capital ( MCC ) ... (D) Cost of floatation (B) by the relative proportion of that type of funds in the capital structure. (vii) Tax liability of the firm is relevant for cost of capital of all the sources of funds. = \(\frac{1.3865}{27.75}\) + 0.12 Hint: (C) 7% & 7.14% (iv) Cost of capital is basic data for NPV technique. Ke = \(\frac{\mathrm{D}_{1}}{\mathrm{P}_{\mathrm{o}}}\) + g A thorough exposition of the theory relating to the cost of capital. Answer:

It is the cost of raising an additional dollar of a fund by the way of equity, debt, etc. NP = Net Proceeds = Sale price – Flotation cost The calculation of the cost of capital should focus on the historical costs of alternative forms of financing rather than market or current costs. From the perspective of providers of capital, it is the rate of return required by them for them to be prepared to make available finance to business entities. (i) Next expected dividend is ₹ 3.60 and expected to grow at the rate of 7%. 62.The span of time within which the investment made for the project will be recovered by the net returns of the project is known as: a. Question 78. (D) 12.32% WACC = 1,727.73/100 = 17.28% (C) 8.24 per cent (A) 10.20% (C) Firm must control We offer Law Assignment Help, MBA Assignment Help and Dissertation Writing Help etc. Chapter 3 Financial Analysis and Planning. Calculate the cost of ordinary equity. [6] Answer:2(a) Calculation of Marginal Cost of Component X- 2870 Per Unit (`) Direct Material ` 5.50 Direct Labour ` 3.50 Other variables ` 1.00 Marginal Cost ` 10.00 (i) Since the marginal cost per unit of 10.00 is lower than the market price of 11.50.It is (C) 0.5572

By interpolation, Redeemable debt 9. The current market price per equity share is ₹ 60. (D) 13% K = Rf +β(Rm – Rf) (B) D1 = [D0(1 – t)] Hint: (A) Price Earning Method This is an estimate and . (B) the cost of common equity and the cost of preferred stock a. Scenarios and examples are included that demonstrate a socially responsible approach. Business Scenarios are presented at the opening of each chapter and this is then used to explore the topics covered given at the start of the chapter. (A) Explicit Cost trailer If the cost of capital is 10%, the net present value . (B) Before-tax cost of preferred stock plus risk premium approach Mr. Lucky purchases an equity share of a growing company, XYY Ltd. for ₹ 525. G Ltd. has 10,000 shares of common stock outstanding at a price per share of ₹ 46 and a rate of return of 14%. Answer: (D) Cost of reserve assets The cost of retained earnings is the opportunity cost of dividends forgone by shareholders. What is the firm’s weighted average cost of capital? For the last year, the company had paid an equity dividend at 25% and its Found inside – Page 30Financial Management 2(3) (Autumn 1973): 56-60. Arditti, F.D. 'The Weighted Average Cost of Capital: Some Questions on its Definition, Interpretation, and Use." Journal of Finance ... "Three Ways to Present the Marginal Cost of Capital.

When considering alternative sources of funding to use for the financing of capital expenditure projects, managers will endeavour to make use of those sources of funds of which the cost of funding is the lowest. Compute the EVA with the help of the following information: Risk-free rate of return is 7%. (D) Cost of debt Hint: – 6,00,000 = – 60,00,000x

(D) 8.57 per cent (D) Before-tax cost of debt plus risk premium approach New investment decisions will be based on the extent of the marginal increase in the WACC brought about by adding new finance to the capital structure. (B) 7.7%

7. Financing decision: Cost of capital; cost of different sources of finance; Weighted average cost of capital, Marginal cost of capital; Concept of operating and financial leverage; Capital 7.00% Because it is calculated taking into account the proportion (weight) of each source of finance in the portfolio, it is referred to as the weighted average cost of capital (WACC). The case study brings the concept of WACC through a discussion between a professor and his students. (C) access to capital and quality management What is the overall cost of capital of Kinara Ltd.? Ke = \(\frac{\mathrm{D}}{\mathrm{P}_{\mathrm{o}}}\) + g (A) Related cost of capital (B) Cost of preferred stock Note that this section uses the cost of long-term bonds in the examples. (C) Implicit Cost, Question 6. Cost of Capital •Cost of capital is the rate of return that a firm must earn on its project investmentsto maintain its market value and attract funds. (A) I (C) Specific cost of capital (D) 11.05% Example of the Opportunity Cost of Capital. He expects to sell shares at the end of year 3 at ₹ 607.75. (D) Asset depreciation value Answer: Answer: (D) 24.50% Although the weights of the sources of capital can be calculated in different ways, the WACC is always calculated at market values for purposes of financial decision-making. It is very relevant … - Selection from Fundamentals of Financial Management, Third Edition [Book] GST Registration Process, Fees, Eligibility, Documents Required | How to Register GST Online? (B) Easy to calculate the cost of capital (C) 8.33% Break-even analysis is an integral and important part of marginal costing. (A) Increase in cost of debt, Question 22. The risk-free rate is 3 percent and the market rate of return is 10.5 percent. Levelized Cost of Energy. Answer: (C) Cost of equity INTRODUCTION • Cost of capital is the minimum rate of return a firm must earn on its investment so that the market value of the company's equity shares does not fall. D1 = D0(1 + g) Answer: Choosing a funding option with a high cost of capital through error will eventually seriously affect the return on investment of a project. Answer: When dividends are declared, holders of preference shares are entitled to receiving dividends before any dividends are paid to ordinary shareholders, hence the name preference shares. %%EOF 2.2 Tools and Techniques of Marginal Costing 13 2.3 Differential Cost Analysis 23 2.4 Differences between Absorption Costing and Marginal Costing 25 . Found insideAs already mentioned, the cost of capital, conceptually speaking, which is relevant is the cost of the new capital to be raised to finance the current capital expenditure decision, that is, marginal cost. It is, therefore, argued that ... (D) Price Earning Method If a company can raise long-term funds from the market at 10%, then 10% can be used as cut-off rate as the management gains only when the project gives return higher than 10%. 'Managing Finance' has been designed both to enable managers to use accounting in the management of their business and to show how this can be done in a socially responsible way. Hint: The cost of share capital would be based upon the expected rate of earnings of a company. The marginal cost of capital may be defined as the 'Cost of obtaining another dollar of new capital.' When a firm raises additional capital from only one source (not different sources) than marginal cost is the specific or explicit cost. (D) 6.03% WACC = 705/100 = 7.05% Chetna Fashions is expected to pay an annual dividend of ₹ 0.80 a share next year. Marginal Cost of Capital: Firms calculate cost of capital in order to determine a discount rate to use for evaluating proposed capital expenditure projects. (C) Capital-asset pricing model approach (B) Capital Assets Pricing Method Answer: (C) 18.34% (A) Cost of option SBS also shares copies of previous exam papers with you during the semester. (D) Equity Dealer Thus the marginal efficiency of capital is the percentage of profit expected from a given investment on a capital asset. (A) 1 only Face value is ₹ 10. Ignore dividend tax. Found inside – Page 7-80According to the financial management point of view , it is described as the relevant costs or the weighted average cost of new funds required to be raised by a company . The marginal cost of capital is a very important concept in ... (D) Beta premium In weighted average cost of capital, a company can affect its capital cost through____ (A) Cost of common equity, Question 32. 0000003699 00000 n (A) 11.75% The change in the WACC that occurs between the current WACC and the WACC once the cost of capital of the additional finance has been included is referred to as the marginal change in the cost of capital. Answer:

(A) Future Cost Chapter 2 Time Value of Money. (D) 15.6% (C) D1 = [D0 × (1 – g)] (A) 9.21% Cost of debt based on book value: (C) 9.72 per cent (C) Relevant cost Chapter 1 Scope and Objectives of Financial Management. The capital structure can consist of a combination of different sources of finance, i.e. Policy of capital structure WACC = 1159.08/100 = 11.59% (B) by the relative proportion of that type of funds in the capital structure. Practical Problems and Case Studies Part II . A long-term loan is similar to a debenture and the after-tax cost of the debt is calculated using the formula provided. (D) Cost of working capital (D) industry attractiveness and competitive advantage, Question 40. Question 79. 5.97% (C) Implicit Cost What is the weighted average cost of capital for a firm with equal amounts of debt and equity financing, a 15% before-tax company cost of equity capit. Answer:

In which of the cost of the following method of equity capital is computed by dividing the dividend by market price per share or net proceeds per share? (C) By dividing the fixed dividend per share by the price per preference share. 0.6 = \(\frac{\text { Debt }}{\text { Equity }}\) Equity shares of Anuradha Ltd. are quoted in the stock exchange at ₹ 325 per share. Found inside – Page 314Weighted average cost of capital ( alternative method ) Total Cost Source of Finance ( 1 ) Market Value ( Rs . ) ( 2 ) Cost ( % ) ( 3 ) ... 10 per cent 24,50,000 MARGINAL COST OF CAPITAL Companies may rise additional funds for expansion . Answer: = 6.5% When calculating a firm's cost of capital, all of the following are true except that A. You may submit any of your answers to the lecturer for assessment and feedback. (D) 17.93% (B) 0.1278 (C) Statement II is false but Statement I is true and . An increase or decrease in total costs that is caused by an increase or decrease in the volume of production and sales is known as marginal cost, differential cost, or . = 0.0714 i.e. FINANCIAL MANAGEMENT Page No. The outstanding debt has a total face value of ₹ 2,00,000 and a market price equal to 98% of face value.

You need not study this method. The marginal cost of funds is the cost of the next increments of capital raised by the firm. Answer: 2. (B) Ke = 18.00%; Kr = 14.40% The marginal weights represent the proportion of various sources of funds to be employed in raising additional funds. It is different from the average cost of capital which is based on the cost of equity and debt already issued. (D) Firm cannot control It is also very important that you can identify and discuss the different sources of long-term funds available to organisations. Growth. (B) 5%, Question 57. The relationship between marginal cost and average cost of capital may be presented with the help of a graph given by Brigham: From Fig. (D) Embedded cost (B) 14%, Question 71. = \(\frac{14(1-0.5)}{100}\) Hint: Thus, to the company, the cost of capital is the minimum rate of return that the company must earn on its investments to fulfill the expectations of the investors. dividend at the end of year one? (D) 10.11 percent While calculating WACC on a market value basis which of the following is not considered – 1. dividend is likely to grow 5% every year. The preferred stock of ISO Ltd. pays an annual dividend of ₹ 6.50 a share and sells for ₹ 48 a share. (C) Cost of equity, Question 15. 11.05% <<3643FE664F5B394BB8D1AF236FA85D29>]>> (C) 6.18% 10.1, it becomes clear that if additional capital is raised up to the amount X, the marginal cost of capital (MCC) and also the average cost of capital (ACC) are identical. A third method to estimate the before-tax cost of debt is to calculate the internal rate of return (IRR) of the cash flows from the debt. Select the best capital mix for the company so that its overall cost of capital is minimum. Average and Marginal Cost Average cost of capital is the weighted average cost of each component of . (D) Cost of retained earnings

The cost of preference shares on the basis of the present value of future cash flow shall be: = \(\frac{3.6}{32}\) + 0.07 Market price of debentures = \(\frac{\text { Interest }}{\text { Market rate of interest }}=\frac{75}{0.16}\) =468.75 Nikon Enterprises just paid an annual dividend of ₹ 1.56 per share. 6. It can be observed from the data of EPS that it is growing by 1296 per annum.

Explain the analyst ' s concern with the marginal cost of capital in evaluating investment projects, and explain the use of the marginal cost of capital and the investment opportunity schedule in determining the optimal capital budget for a company. Syllabus 04 2. Answer: (A) 17.49%, Question 54. During 5 years dividend on equity shares have steadily grown from ₹ 26.5 to ₹ 35.48. Found inside – Page 309The marginal cost of capital approach involves calculating a marginal cut-off rate for acceptable investment projects by: (a) Establishing rates of return for each component of capital structure, except retained earnings, ... The EPS of the last 4 years is as follows. The overall (weighted average) cost of capital is composed of a weighted average of (C) Economic Cost (D) 6.7% (A) 6.65% (C) 5.7%, Question 63. (B) 10.75%, Question 60. Answer: Page-1 section-8 (C) Adjusted Dividend Method The Weightage of the common equity to the total capital is. 10 lakhs: Save my name, email, and website in this browser for the next time I comment.

Period of return b. Payback period c. Span of return d. None of the above 0000008500 00000 n The debentures are redeemable after 3 years and interest is paid annually. Australian Writers for Hire | MBA, Ph.D & Masters. Ratio Analysis 17 4 5. Answer: Answer: (A) Component cost, Question 16. Financial Management (Chapter 14: The Cost of Capital) 14.1 The Cost of Capital: An Overview. From the following details calculate the WACC: Hint: (D) 16.6% The example and table explain and demonstrate how to calculate and interpret a break point. (A) 14.5 percent, Question 70. The company wants to raise additional capital of ₹ 10 lakhs including debt of ₹ 4 lakhs. Indeed, because risk can trigger losses that deplete . Hint: (C) Decrease in cost of debt (B) 7.40%, Question 59. Answer: (C) Implicit Cost 19,00,000 = 25,00,000 – (60,00,000 × x) (B) A is false but R is true 0000002878 00000 n No1 Assignment Writing Services in Australia , Get in tuch on Social, ECON1035 Business Statistics Assignment Answers, FNS50215 – FNSFMK505 Diploma of Accounting Assessment 2 Answers, BUSN4100 Business Research Methods Assessment Answers, EIA2006 Basic Econometrics Case Study Assignment Answer, LAWS104 Foundations of Law and Legal Research Assessment Answer, BUSI 2133 Organization Theory and Design Assessment Answer, How To Write A Good Argumentative Essay? (D) All 1, 2 & 3, Question 4. Marginal cost____ Understanding how to calculate the cost of capital is essential knowledge for financial managers. Flotation cost is 10% of face value. (D) Market risk premium Reason (R): Market rate of return = 15%. The marginal cost of capital is the weighted average cost of new capital calculated by using the marginal weights. (Equity will remain at 20 percent of the capital structure, but will all be in the form of new common stock, K n.) d. The 9.6 percent cost of debt referred to earlier applies only to the first $29 million of debt. (B) Interest × (1 – t) ÷ Net proceeds, Question 37. Hint: Exhibit 1: The cost of capital estimation process The cost of capital for a company is the cost of raising an Corporate tax is 35% and corporate dividend tax is 10%. (B) Before-tax cost of preferred stock plus risk premium approach, Question 49. That is, we show that it's an estimate. The cost of preference shares can consequently be higher than that of ordinary shares. = 17% Which of the following formula you will use while calculating the value of the firm? (A) 12.775% Statement I: the after-tax cost of debtYou need to take note of the different ways in which the before-tax cost of debt can be obtained. Ù��A��߄3�����M� �]d��~3�>[���y��q�V�4�%����)1�5��3���cH"+��b��V�:�m����8|�eɻ��Zz�,U��/�U5؍?�C�-���#E�d��B�Ɍ������{����!׿�1]������. Answer: In other words, we can say that the company is paying a premium of 13% to the lenders of capital as a return for their risk. 0000033908 00000 n

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