The price of Capital

 Essay for the Cost of Capital

Chapter 8

The price tag on Capital

236

CHAPTER 8—THE COST OF CAPITAL

TRUE/FALSE

1 ) Capital refers to items for the right-hand aspect of a firm's balance sheet.

installment payments on your The aspect costs of capital happen to be market-determined parameters in as much as they are based on investors' necessary returns.

three or more. The cost of debt is comparable to one without the marginal duty rate increased by the promotion rate on excellent debt.

some. The cost of providing preferred inventory by a corporation must be adjusted to an after-tax figure because of the 70 percent dividend exclusion dotacion for corporations holding other corporations' recommended stock.

a few. The business cost of external equity capital is the same as the mandatory rate of return within the firm's outstanding common stock.

6. The cost of equity elevated by retaining earnings could be less than, comparable to, or higher than the cost of collateral raised by selling new concerns of common stock, according to tax prices, flotation costs, the frame of mind of shareholders, and other factors.

7. The price tag on equity capital from the sale of new prevalent stock (ke) is generally corresponding to the cost of fairness capital coming from retention of earnings (ks), divided by one minus the flotation cost as a percentage of product sales price (1 - F).

8. Cash acquired by firm through retaining earnings have no cost because there are simply no dividend or interest payments associated with them, although capital raised by selling new stock or bonds does have a cost.

on the lookout for. The measured average cost of capital improves if the total funds required call for some equity more than what can be obtained as retained earnings.

10. The little cost of capital (MCC) is a cost of the very last dollar of recent capital which the firm increases, and the minor cost diminishes as more and more of your specific form of capital can be raised throughout a given period.

11. Even if a firm acquires all of the common equity from retained earnings, their MCC routine might continue to increase in the event very large numbers of new capital are needed.

Chapter eight

The Cost of Capital

237

doze. There is a jump, or break, in a business's MCC plan each time the firm operates out of a particular supply of capital in a particular expense. For example , a firm may use up its 10 percent debt and can then issue more financial debt only if it offers a higher rate to investors.

13. The correct price cut rate for any firm to use in capital cash strategy, assuming that fresh investments will be of the same amount of risk because the business's existing resources, is the marginal cost of capital.

18. The firm's cost of capital represents the maximum rate of return a firm may earn from the capital cost management projects to ensure the value of the firm increases.

15. The price tag on capital may be the firm's typical cost money given the particular market requirements be paid to attract the funds.

sixteen. The cost of capital used in capital budgeting should be determined making use of the specific auto financing used to pay for that particular project.

17. A firm's capital structure does not have impact on the firm's measured average cost of capital.

18. Each component cost of particular types of capital is identical for every single source of funds found in a firm's capital structure.

19. The following tax expense of debt is used to compute the weighted average expense of capital since we are concerned with the after-tax cash goes of the company.

20. Taxes adjustments for the cost of favored stock should be made when ever determining the expense of capital since dividend bills on recommended stocks happen to be tax deductible.

21. If a firm cannot invest maintained earnings and earn at least the price tag on equity, it may pay these funds to shareholders and enable them make investments directly in other assets which in turn provide this return.

22. Long-term capital gains will be taxed in a lower rate than dividends for most stockholders leading firms to pay out dividends rather than employ retained earnings to fund capital projects.

3. Flotation expenses associated with issuing new equity trigger the cost of exterior...


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