1) A company is just about to pay a dividend of $0

1) A company is just about to pay a dividend of $0.24. The current market price of the share is $2.52. The dividend growth rate is 5% and this is expected to continue into the future.

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1)    A company is just about to pay a dividend of $0.24. The current market price of the share is $2.52.  The dividend growth rate is 5% and this is expected to continue into the future.

Calculate the cost of equity.

2)    Company’s cost of equity is 10%, after tax cost of bonds is 6·43%, cost of preference shares is 8%, Market value of ordinary shares is £ 125m, Market Value of Bonds i£ s 6·25m and market value of preference shares is £ 21m. Calculate the weighted average cost of capital. 

3)    Why is the market value of different sources of finance used rather than book values when calculating WACC?

4)    What are the limitations of the dividend growth model in calculating the cost of equity?

5)    According to Modigliani and Miller I (without taxes) that the WACC remains constant and therefore there is no optimal capital structure.

True

 

False

 

6)    Modigliani and Miller (II) With Taxes states that an optimal capital structure does not

True

 

False

 

7)    Based on the CAPM equation, the required return depends on the risk of an investment.

True

 

False

 

8)    Why is the cost of debt lower than cost of equity?

 

9)    If the risk free rate is 5%, market return is 14% and Beta is 0.5. Calculate the cost of equity.

10) WACC is a function of a firm’s:

A) Growth rate

 

B) Earnings

 

C) Investment potential

 

D) None of the above

 

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