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Ateneo de Manila University 쇴 ACCOUNTING
! FIN ACC 쇴 Quiz 02 - Cost of Capital.pdf

Quiz 02 - Cost of Capital.pdf

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University of the East

Caloocan City

Valuation and Methods October, 2020

Quiz 02: Cost of Capital Instructor: John Bo S. Cayetano
1) Assume that you are a consultant to Wrong Company and you have been provided with the following
data: D1 = P0.67; P 0 = P42.50; and growth rate is 8%.

What is the cost of equity from retained earnings based on the DGM approach?
A. 11.68% C. 9.96%
B. 9.58% D. 11.30%

View answer and explanation 쇯

clarabaldomero22 숥 Veri6ed Expert

Answer:
B.

Step-by-Step explanation
! D1 = P 0.67, P0= P42.50, Growth rate = 8%
Finding cost of equity
Re = (D1 / P0) + g
where Re = cost of equity, D1 = dividend, P0 = current price share and g =
growth rate
Re = (0.67 / 42.50) + 8/100
= 0.01576470588 + 0.08
= 0.09576470588
In percentage = 0.09576470588 x 100
= 9.576470588%
Rounded o\ to 2 decimal places = 9.58%

Answer: = 9.58%

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F M
2) I Feel Inside Company has the following data: R = 5%; RP = 6%; and ࠵?= 1.10. What is the firm's
cost of equity from retained earnings based on the CAPM?
A. 6.1% C. 11.83%
B. 13.22% D. 8.93%

View answer and explanation 쇯

chrisbretana 숥 Veri6ed Expert

Answer:
The answer is 11.60%

Step-by-Step explanation

Solution:
Cost of equity from retained earning as per the Capital Asset pricing model-
= Risk free rate+( Beta *Market risk premium)
= (5+(6*1.10)
= 11.60%.

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Numbers 3 - 4
Thief Company is preparing to issue new ordinary shares. Thief's stock is currently selling in the market for
P50. Very recently, the stock paid a dividend of P2 per share. Dividends are expected to grow 10% per
year through the foreseeable future.

Flotation costs on the new issue will be P3 per share. Thief's marginal tax rate is 34%. Assume that the
new stock can be sold to investors at the current price of the existing shares.

3) Based on the information above, Thief cost of new ordinary shares is nearest to:
A. 14.40% C. 14.25%
:
 A. 14.40% C. 14.25%
B. 14.68% D. 8.33%

!
View answer and explanation 쇯

KimJurry99 숥 Veri6ed Expert

Answer:
3) Based on the information above, Thief cost of new ordinary shares is nearest to:

Answer: B. 14.68%

Step-by-Step explanation

Cost of new ordinary shares

= [D1 / (P0 - Flotation cost)] + g
= [(2 x 1.10) / (50 - 3)] + 0.10
= (2.2 / 47) + 0.10
= 0.0468 + 0.10
= 0.1468
= 14.68%

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4) Based on the information above, Thief's cost of retained earnings is nearest to:

A. 14.4% C. 14.0%
B. 4.4% D. 4.7%

View answer and explanation 쇯

Charisse123Pepito 숥 Veri6ed Expert

Answer:
C.

Step-by-Step explanation

Cost of retained earnings is a cost of funds by a corporation that is generated

and incurred internally. This funds was not retained internally and was paid to
the investors in the forms of dividend. The formula for the cost of retained
earnings is:
CRE= (upcoming years dividends/stock price)+growth
Thus,
Upcoming years dividends= P2
Stock price = P50
Growth = 10%
CRE= (upcoming years dividends/stock price)+growth
CRE= (P2/P50)+10%
CRE= 0.14 OR 14%(0.14*100)

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5) Sumayaw Company is preparing to float a new issue bonds. The bonds will have the following
characteristics:

Coupon rate: 8.4% Face value: P1,000,000

Term to maturity: 10 years Issue price: 900,300
Sumayaw's marginal tax rate is 34%. The coupon rate payment must be paid semi-annually.
Sumayaw's cost of debt for this bond issue will be nearest to:
A. 5.0% C. 3.3%
B. 6.6% D. 1.7%

View answer and explanation 쇯

ProfessorMarie 숥 Veri6ed Expert

Answer:
A.

Step-by-Step explanation

The formula will be:

Cost of Debt = {C + [(FV - PV) / n]} / [ ( FV + PV) / 2]
wherein:
C = Coupon interest payment
FV = Face Value of Bond
:
 FV = Face Value of Bond
PV = Present Value of Bond
n = number of compounding period
* Cost of Debt is also known as Yield to Maturity / E?ective Interest
Rate.

Given:
Coupon Rate 4.2% ( 8.4% / 2)
Face Value of Bond P 1,000,000
Present Value of Bond P 900,300
Number of periods 20 ( 10 years * 2)
* This is semi-annual.

First, Compute the interest payment

= Face Value of Bond * Coupon rate
= P 1,000,000 * 4.2%
= P 42,000

Cost of Debt= {C + [(FV - PV) / n]} / [ ( FV + PV) / 2]

= {P 42,000 + [(P 1,000,000 - P 900,300) / 20]} / [ ( P
1,000,000 + P 900,300) / 2]
= [ P 42,000 + ( P 99,700 / 20)] / (P 1,900,300 /2)
= ( P 42,000 + P 4,985) / P 950,150
= P 46,985 / P 950,150
= 0.04945008682 / 5%

NOTE:
If you have questions or inquiries, kindly comment it so I can respond quickly.
Thank you.

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6) You were hired as a consultant to Bitaw Company, whose target capital structure is 40% debt, 15%
preferred, and 45% common equity. The after-tax cost of debt is 6%, the cost of preferred is 7.50%, and
the cost of retained earnings is 13%. The firm will not be issuing any new stock.

What is its WACC?

A. 11.44% C. 9.19%
B. 7.22% D. 9.38%

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7) Fall Company expect to earn P3.50 per share during the current year, its expected dividend payout ratio
is 65%, its expected constant dividend growth rate is 6.0%, and its common stock currently sells for
P50.00 per share. New stock can be sold to the public at the current price, but a flotation cost of 5%
would be incurred.

What would be the cost of equity from new common stock?

A. 12.73% C. 10.79%

B. 9.28% D. 10.68%

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FAR by: John Bo S. Cayetano, CPA, MBA Page 1 of 3

8) Time Inc.'s perpetual preferred stock sells for P75.00 per share, and it pays an P8.50 annual dividend.
If the company were to sell a new preferred issue, it would incur a flotation cost of 4% of the price paid
by the investor.

What is the company's cost of preferred stock for use in calculating the WACC?
A. 14.40% C. 11.81%
B. 13.93% D. 14.28%

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9) Sam Corporation is planning to issue 100,000 shares of 10%, P50 par value preferred stocks for P80
per share. The company pays income tax at a rate of 30%.

What is the cost of capital (preferred stocks)?

A. 10% C. 6.25%
B. P5 D. 4.25%

View answer and explanation 쇯

swift2020 숥 Veri6ed Expert

Answer:
C.

Step-by-Step explanation

The answer is 6.25%

Formula:

Cost of preferred stock = Preferred dividend per Share/price per share

Preferred dividend per share = Par Value multiplied by preferred share

percentage
substituting the given numbers, we will now have P50 par value multiplied by
10% which is equal to P5

Cost of preferred stock = P5/P80

Cost of preferred stock = 6.25%
:
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10) Tanya Corporation issued preferred stocks for P120 per share. The issue price is P20 more than the
stock's par value. The company incurred underwriting fees of P10 per share. The stock will earn annual
dividends of P12 per share.
If the tax rate is 30%, the cost of capital (preferred stock) is
A. 10% C. 7.42%
B. 12% D. 10.91%

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11) Vicky Corporation has preferred stocks that pay dividends of P6.72 per share. If the cost of funds (capita)
coming from preferred stock is 12% and the income tax rate is 30%.
What is the price of the preferred stock?
A. 56 C. 1.79
B. 0.81 D. 38.08

View answer and explanation 쇯

ShellyRose7397 숥 Veri6ed Expert

Answer:
B.

Step-by-Step explanation

슦 1 Attachment

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12) Harry Corporation's common stocks currently sell for P40 per share. The estimated dividend payment
at the end of this year is P4 per share. The expected growth rate is 12%.
:
 at the end of this year is P4 per share. The expected growth rate is 12%.

Using the dividend growth model, the cost of capital is

A. 22% C. 12%
B. 10% D. 23%

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13) Feeling Corporation expects to pay dividends of P5 per share at the end of this year. The expected
growth rate is 10%.

Using the dividend growth model, what is the stock's market price if the cost of capital (common stock)
is 25%
A. 14.29 C. 20
B. 50 D. 33.33

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14) Unye Corporation expects to pay dividends of P4.80 per share at the end of the current year. The
dividend growth rate is 10% and the cost of common equity capital is 14%.

If the dividend growth model is used to appraise Unye Corporation's shares of stocks, the price of the
stocks to the public is
A. 120 C. 14%
B. 5.28 D. 15.4%

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15) How You Like That Company has the following target capital structure and costs:

Proportion of capital structure Cost of capital

Debt 30% 10%
Common stock 60% 12%
Preferred stock 10% 10%

The company's marginal tax rate is 30%. What is the company's weighted average cost of capital?
A. 7.84% C. 10.30%
B. 9.30% D. 11.20%

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Cost Accounting by: John Bo S. Cayetano, CPA, MBA Page 2 of 3

:
 섈 슼 *

TITLE

Quiz 02 - Cost of Capital.pdf

SCHOOL

Ateneo de Manila University

COURSE TITLE

ACCOUNTING FIN ACC

UPLOADED BY

BaronSteel933

PAGES

TERM

Winter 2015

PROFESSOR

DELA VEGA

TAGS

Dividend yield,
Weighted average cost of capital

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