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4. ] Boundless.com/finance?campaign_content=book_192_ch apter_10&campaign_term=Finance&utm_campaign=powe rpoint&utm_medium=direct&utm_source=boundless Introduction to the Cost of Capital The Basics of the Cost of Capital Valuing Different Costs Approaches to Calculating the Cost of Capital The WACC Free to share, print, make copies and changes. Get yours at www.boundless.com

5. Defining the Cost of Capital Differences Between Required Return and the Cost of Capital Relationship Between Financial Policy and the Cost of Capital The Basics of the Cost of Capital Introduction to the Cost of Capital > The Basics of the Cost of Capital Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

6. If a project is of similar risk to a company's average business activities, it is reasonable to use the company's average cost of capital as a basis for project evaluation. A company's securities typically include both debt and equity; therefore, one must calculate both the cost of debt and the cost of equity to determine a company's cost of capital. Weighted average cost of capital takes into account the amount of financing that comes through the use of debt and the use of equity. IRR is the rate of return that makes the net present value of all cash flows from an investment equal zero. Defining the Cost of Capital Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-basics-of-the-cost-of-capital- 87/defining-the-cost-of-capital-372- 8286?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Net Present Value Equation View on Boundless.com Introduction to the Cost of Capital > The Basics of the Cost of Capital

7. Cost of capital refers to the expected returns on all of the various securities issued by a company, often expressed as a weighted average. Required refers to the rate of return necessary to achieve in order to compensate investors for taking on the risk of the individual investment. The risk premium can be established by understanding business risk and financial risk. Differences Between Required Return and the Cost of Capital Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-basics-of-the-cost-of-capital- 87/differences-between-required-return-and-the-cost-of-capital-373- 3448?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Obtaining Required Return View on Boundless.com Introduction to the Cost of Capital > The Basics of the Cost of Capital

8. As opposed to strictly using cost of capital, decisions must be made using opportunity cost of capital. Opportunity cost of capital is the amount of money foregone by investing in one asset compared to another. Facets of financial policy include valuation, portfolio theory, hedging, and capital structure. Relationship Between Financial Policy and the Cost of Capital Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-basics-of-the-cost-of-capital- 87/relationship-between-financial-policy-and-the-cost-of-capital-374- 3449?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Oil Prices View on Boundless.com Introduction to the Cost of Capital > The Basics of the Cost of Capital

9. The Cost of Debt The Cost of Preferred Stock The Cost of Common Equity The Cost of Retained Earnings The Cost of New Common Stock Valuing Different Costs Introduction to the Cost of Capital > Valuing Different Costs Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

10. Cost of debt equals the interest rate of the debt (composed of the risk-free rate and a credit risk premium) times one minus the corporate tax rate. Cost of debt is also equal to the annual interest payment of the debt divided by its market value. The yield to maturity can be used in determining the cost of debt. It is is the discount rate at which the sum of all future cash flows from the bond are equal to the price of the bond. The Cost of Debt Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/valuing-different-costs-88/the-cost-of- debt-375- 10512?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Union Camp Corporation Bond Certificate View on Boundless.com Introduction to the Cost of Capital > Valuing Different Costs

11. Preferred stock is an equity security with properties of both an equity and a debt instrument. Because preferred stock carries a differing amount of risk than other types of securities, we must calculate its asset specific cost of capital to work into our overall weighted average cost of capital. The dividend is usually specified as a percentage of the par value or as a fixed amount. The Cost of Preferred Stock Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/valuing-different-costs-88/the-cost-of- preferred-stock-376- 8353?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Cost of Preferred Stock View on Boundless.com Introduction to the Cost of Capital > Valuing Different Costs

12. A company's current cost of equity can be difficult to determine because it is unobservable and must be estimated. The cost of equity can be estimated by comparing the investment to other investments with similar risk profiles. Other methods of estimating cost of equity include the capital asset pricing model, the dividend growth model, and the bond plus model. The Cost of Common Equity Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/valuing-different-costs-88/the-cost-of- common-equity-377- 8725?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less CAPM Method View on Boundless.com Introduction to the Cost of Capital > Valuing Different Costs

13. Retained earnings refers to the portion of net income (or loss) that is retained by a company rather than distributed to its owners as dividends. We can think of the cost of retained earnings in relation to the opportunity cost of how we can use these funds elsewhere. When deciding how to finance a new project, companies have a tendency to follow the pecking order of finance, preferring internal sources of capital to external sources of capital. The Cost of Retained Earnings Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/valuing-different-costs-88/the-cost-of- retained-earnings-378- 8354?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Retention Rate View on Boundless.com Introduction to the Cost of Capital > Valuing Different Costs

14. If a mixture of internal and external sources of financing are used, a company must determine the proportion of external financing to be used, and thus the marginal cost of capital. Flotation costs include all costs of issuing the securities, such as banker's fees, legal fees, underwriting fees, filing costs, etc. Cost of new common stock is calculated using the dividend growth model, by devaluing the current stock price by the amount of flotation cost. The Cost of New Common Stock Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/valuing-different-costs-88/the-cost-of- new-common-stock-379- 3902?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Cost of New Equity View on Boundless.com Introduction to the Cost of Capital > Valuing Different Costs

15. The Capital Asset Pricing Model The SML Approach Discounted Cash Flow Approach The "Bond Yield Plus Risk Premium" Approach Approaches to Calculating the Cost of Capital Introduction to the Cost of Capital > Approaches to Calculating the Cost of Capital Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

16. CAPM determines the expected rate of return of an asset. The model takes into account the asset's sensitivity to systematic risk (beta), the expected return of the market, and the expected return of a risk-free asset. CAPM states that investors are only rewarded for bearing systematic risk. CAPM states that if the expected return is not greater than or equal to our required return the investment should not be made. The Capital Asset Pricing Model Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/approaches-to-calculating-the-cost-of- capital-89/the-capital-asset-pricing-model-380- 3907?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less CAPM Equation View on Boundless.com Introduction to the Cost of Capital > Approaches to Calculating the Cost of Capital

17. The SML graphs the relationship between risk β (beta) and expected return. All correctly priced assets lie on the SML. If a security is priced above the SML, it is undervalued. If it is priced below the SML, it is overvalued. The SML Approach Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/approaches-to-calculating-the-cost-of- capital-89/the-sml-approach-381- 3908?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less SML Equation View on Boundless.com Introduction to the Cost of Capital > Approaches to Calculating the Cost of Capital

18. In the DCF approach, all future expected cash flows associated with the asset are discounted in order to find their present values. To determine the value of the asset, the present values of all expected cash flows are summed. When future cash flows are infinite or extend past a certain period, a terminal value can be found and discounted back to the present. Comparing a value found using the DCF approach with the actual price of an asset determines if an asset is undervalued, overvalued, or correctly priced. Discounted Cash Flow Approach Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/approaches-to-calculating-the-cost-of- capital-89/discounted-cash-flow-approach-382- 3909?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Present Value Equation View on Boundless.com Introduction to the Cost of Capital > Approaches to Calculating the Cost of Capital

19. The BYPRP approach applies to a company's publicly traded equity. The yield to maturity is the discount rate at which the sum of all future cash flows from a bond are equal to its price. The equity risk premium is the return that stocks are expected to receive in excess of the risk-free interest rate. The BYPRP approach does not produce as accurate an estimate as the capital asset pricing model or discounted cash flow analysis. The "Bond Yield Plus Risk Premium" Approach Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/approaches-to-calculating-the-cost-of- capital-89/the-bond-yield-plus-risk-premium-approach-383- 8734?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Bond Yield Plus Risk Premium Equation View on Boundless.com Introduction to the Cost of Capital > Approaches to Calculating the Cost of Capital

20. Weighted Average Cost of Capital The Weightings Factors Controlled by the Firm Factors External to the Firm Making Risk Adjustments Problems with WACC The WACC Introduction to the Cost of Capital > The WACC Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=dir ect&utm_source=boundless

21. The WACC is the minimum rate of return a company must earn on a new venture in order to make the investment worthwhile. The various securities that companies use as sources of finance are expected to generate different returns. To calculate WACC, multiply the cost of debt by the ratio of debt to total market value of the company. Then add this to the cost of equity multiplied by the ratio of equity to total market value. Weighted Average Cost of Capital Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-wacc-90/weighted-average-cost-of- capital-384- 10510?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless WACC Equation View on Boundless.com Introduction to the Cost of Capital > The WACC

22. The WACC must take into account the weight of each component of a company's capital structure. The calculation of the WACC usually uses the market values of the various components rather than their book values. Market value is the price at which an asset would trade in a competitive auction setting. Book value refers to the value of an asset according to the account balance present on the balance sheet of a company. If the value of a company's debt exceeds the value of its equity, the cost of its debt will have more "weight" in calculating its total cost of capital than the cost of equity. If the value of the company's equity exceeds its debt, the cost of its equity will have more weight. The Weightings Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-wacc-90/the-weightings-385- 8726?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Domestic Balance Sheet View on Boundless.com Introduction to the Cost of Capital > The WACC

23. Capital structure refers to the way a company finances its assets through some combination of equity, debt, or hybrid securities. When a higher proportion of debt is chosen, the cost of debt must factor in credit risk. Changes in a company's dividend policy provide information to investors, who should react accordingly to either increase or decrease the value of an asset. Factors Controlled by the Firm Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-wacc-90/factors-controlled-by-the- firm-386- 10509?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless Expected Investor Return View on Boundless.com Introduction to the Cost of Capital > The WACC

24. Since debt expense is tax-deductible, the cost of debt is computed as an after tax cost to make it comparable with the cost of equity. The Federal Reserve moderates long-term interest rates, which causes fluctuations in the risk-free rate that affect the cost of capital. Economic conditions refer to the demand and supply of capital in the marketplace that can impact how capital is raised, and therefore what the cost of capital will be. Market conditions refer to the demand for higher rates of return by investors, which will increase the cost of capital. Factors External to the Firm Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-wacc-90/factors-external-to-the-firm- 387- 10511?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless U.S. Corporate Taxes View on Boundless.com Introduction to the Cost of Capital > The WACC

25. It is possible to adjust risk by figuring the differing risk into the company's beta. The beta coefficient is the risk of a new project in relation to the risk of the market as a whole. Therefore, if a new project of differing risk is undertaken, the beta for that project will be weighted into the company's overall cost of capital. Making Risk Adjustments Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-wacc-90/making-risk-adjustments- 388- 8339?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=bound less Beta Equation View on Boundless.com Introduction to the Cost of Capital > The WACC

26. While the relative debt and equity values can be easily determined, calculating the costs of debt and equity can be problematic. The problem inherent in different methods used to calculate cost of equity is that at least one component is an estimate. The terms of risk-free bonds used in determining cost of debt may not always adequately match the terms of the company's debt. Problems with WACC Free to share, print, make copies and changes. Get yours at www.boundless.com www.boundless.com/finance/textbooks/boundless-finance-textbook/introduction-to-the-cost-of-capital-10/the-wacc-90/problems-with-wacc-389- 10508?campaign_content=book_192_chapter_10&campaign_term=Finance&utm_campaign=powerpoint&utm_medium=direct&utm_source=boun dless U.S. Treasuries Yield View on Boundless.com Introduction to the Cost of Capital > The WACC

27. Free to share, print, make copies and changes. Get yours at www.boundless.com Appendix

28. Key terms benchmark A standard by which something is evaluated or measured. beta Average sensitivity of a security's price to overall securities market prices. business risk The risk associated with the operational and administrative procedures of the particular industry or company. capital Money and wealth; the means to acquire goods and services, especially in a non-barter system. capital intensity ratio the amount of fixed or real capital present in relation to other factors of production, especially labor coupon payment A periodic interest payment that the bondholder receives during the time between when the bond is issued and when it matures. covariance A measure of how much two random variables change together. default To fail to meet an obligation. discount rate The interest rate used to discount future cash flows of a financial instrument; the annual interest rate used to decrease the amounts of future cash flow to yield their present value. dividend payout ratio The fraction of net income a firm pays to its stockholders in dividends. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital

29. dividend yield A company's total annual dividend payment per share, divided by its price per share. financial risk An umbrella term for multiple types of risk associated with financing, including financial transactions that include company loans in risk of default. hybrid instrument A broad group of securities that pay a predictable (fixed or floating) rate of return or dividend until a certain date, at which point the holder has a number of options including converting the securities into the underlying share. inflation An increase in the general level of prices or in the cost of living. internal rate of return IRR. The rate of return on an investment which causes the net present value of all future cash flows to be zero. leverage The use of borrowed funds with a contractually determined return to increase the ability of a business to invest and earn an expected higher return (usually at high risk). lobbying The act of attempting to influence decisions made by officials in the government, most often legislators or members of regulatory agencies. Marginal Cost of Capital The cost of the marginal dollar of capital that a firm could raise externally. maturity Date when payment is due. Opportunity cost The cost of an opportunity forgone (and the loss of the benefits that could be received from that opportunity); the most valuable forgone alternative. principal payment The payment made upon maturity of a bond projection period The time duration for estimating the future cash flows of a proposed investment. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital

30. proxy A measurement of one physical quantity that is used as an indicator of the value of another. proxy fight a conflict where two powers use third parties as a supplement to, or a substitute for fighting each other directly required return the minimum gain expected by investors retained earnings The portion of net income that is retained by the corporation rather than distributed to its owners as dividends. risk The potential (conventionally negative) impact of an event, determined by combining the likelihood of the event occurring with the impact, should it occur. slope The ratio of the vertical and horizontal distances between two points on a line; zero if the line is horizontal, undefined if it is vertical. Synergy Benefits resulting from combining two different groups, people, objects, or processes. systematic risk The risk associated with an asset that is correlated with the risk of asset markets generally, often measured as its beta. time value of money The value of money, figuring in a given amount of interest, earned over a given amount of time. Unsystematic risk Risk peculiar to an asset, which can be eliminated through diversification. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital

31. Bond Yield Plus Risk Premium Equation States that the required return on an equity equals the yield of the company's long-term debt plus the equity's risk premium. Free to share, print, make copies and changes. Get yours at www.boundless.com Code Cogs. "Online LaTeX Equation Editor - create, integrate and download." CC BY http://codecogs.com/latex/eqneditor.php View on Boundless.comCC BYhttp://codecogs.com/latex/eqneditor.phpView on Boundless.com Introduction to the Cost of Capital

32. Yield To Maturity Graph A hypothetical graph showing yield to maturities (or internal rates of return) for corresponding present values. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "IRR1 - Grieger." CC BY-SA http://en.wikipedia.org/wiki/File:IRR1_-_Grieger.jpg View on Boundless.comCC BY-SAhttp://en.wikipedia.org/wiki/File:IRR1_-_Grieger.jpgView on Boundless.com Introduction to the Cost of Capital

33. Domestic Balance Sheet If the person analyzing a company chooses or if the market value of a company's debt and equity is not available, the book value can be used. The book value of debt and equity can be found on the company's balance sheet. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "DWBA DBS." CC BY-SA 3.0 http://commons.wikimedia.org/wiki/File:DWBA_DBS.jpg View on Boundless.comCC BY-SA 3.0http://commons.wikimedia.org/wiki/File:DWBA_DBS.jpgView on Boundless.com Introduction to the Cost of Capital

34. Cost of Preferred Stock The cost of preferred stock is equal to the preferred dividend divided by the preferred stock price, plus the growth rate. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikispaces. "SU3FINANCE - Chapter 12 - Determining the Cost of Capital." CC BY-SA http://su3finance.wikispaces.com/Chapter+12+- +Determining+the+Cost+of+Capital View on Boundless.comCC BY-SAhttp://su3finance.wikispaces.com/Chapter+12+- +Determining+the+Cost+of+CapitalView on Boundless.com Introduction to the Cost of Capital

35. Systematic vs. Unsystematic Risk As the number of stocks in a portfolio increase, the amount of unsystematic risk approaches zero. However, it is impossible to remove systematic risk, as it concerns the economy in general. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikibooks. "Principles of Finance/Section 1/Chapter 5/Risk/Risk." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_5/Risk/Risk View on Boundless.comCC BY-SA 3.0http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_5/Risk/Risk View on Boundless.com Introduction to the Cost of Capital

36. Present Value of the Terminal Value Use this equation to find the present value of a future terminal value. Where TV = terminal value, k = discount rate, and n = the number of periods back to the present. Free to share, print, make copies and changes. Get yours at www.boundless.com OER Commons. CC BY http://www.oercommons.org/courses/entrepreneurial-finance-spring-2011/view View on Boundless.comCC BYhttp://www.oercommons.org/courses/entrepreneurial-finance-spring-2011/viewView on Boundless.com Introduction to the Cost of Capital

37. Example Equation $10 divided by $100, plus 3%. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikispaces. "SU3FINANCE - Chapter 12 - Determining the Cost of Capital." CC BY-SA http://su3finance.wikispaces.com/Chapter+12+- +Determining+the+Cost+of+Capital View on Boundless.comCC BY-SAhttp://su3finance.wikispaces.com/Chapter+12+- +Determining+the+Cost+of+CapitalView on Boundless.com Introduction to the Cost of Capital

38. Net Present Value Equation Equation used to determine net present value, and therefore internal rate of return. DPV = discounted net present value, N = total number of periods in which a cash flow occurs, t = the specific period of the cash flow, FV = the value of the future cash flow, and i = internal rate of return. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Discounted cash flow." GNU FDL http://en.wikipedia.org/wiki/Discounted_cash_flow View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Discounted_cash_flowView on Boundless.com Introduction to the Cost of Capital

39. SML Equation The SML is the graphical representation of CAPM, and thus is found using the same equation. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikibooks. "Principles of Finance/Section 1/Chapter 7/Capital Asset Pricing Model." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_Model View on Boundless.comCC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_ModelView on Boundless.com Introduction to the Cost of Capital

40. Terminal Value Equation FCFN+1 = future cash flow one year after the projection period. k = discount rate. g = assumed constant growth rate. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Terminal value (finance)." GNU FDL http://en.wikipedia.org/wiki/Terminal_value_(finance) View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Terminal_value_(finance)View on Boundless.com Introduction to the Cost of Capital

41. Cost of Debt Equation Cost of debt is equal to the annual interest payment of the debt divided by its market value. Free to share, print, make copies and changes. Get yours at www.boundless.com The Motley Fool. CC BY-SA http://wiki.fool.com/Cost_of_debt View on Boundless.comCC BY-SAhttp://wiki.fool.com/Cost_of_debtView on Boundless.com Introduction to the Cost of Capital

42. Example Equation Required return = 6% + 4% Free to share, print, make copies and changes. Get yours at www.boundless.com Code Cogs. "Online LaTeX Equation Editor - create, integrate and download." CC BY http://codecogs.com/latex/eqneditor.php View on Boundless.comCC BYhttp://codecogs.com/latex/eqneditor.phpView on Boundless.com Introduction to the Cost of Capital

43. CAPM Equation The expected rate of return = the rate of return for a risk-free asset + beta* (the rate of return of the market - the risk-free rate). The return of the market minus the risk-free rate is also known as the risk premium. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikibooks. "Principles of Finance/Section 1/Chapter 7/Capital Asset Pricing Model." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_Model View on Boundless.comCC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_ModelView on Boundless.com Introduction to the Cost of Capital

44. Equation For Cost of Debt Cost of debt equals the interest rate of the debt (composed of the risk-free rate and a credit risk premium) times one, minus the corporate tax rate. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Cost of capital." GNU FDL http://en.wikipedia.org/wiki/Cost_of_capital View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Cost_of_capitalView on Boundless.com Introduction to the Cost of Capital

45. WACC Equation In this formula, V is equal to the value of the firm, or Debt (D) plus Equity (E). r(D) is the company's rate on debt, r(E) the rate on equity. T is the company's marginal tax rate. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikibooks. "Principles of Finance/Section 1/Chapter 6/Corp/WACC." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_6/Corp/WACC View on Boundless.comCC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_6/Corp/WACCView on Boundless.com Introduction to the Cost of Capital

46. Expected Investor Return To calculate expected investor return, divide the dividend payment per share by the market price of the asset and add the expected growth rate. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Cost of capital." GNU FDL http://en.wikipedia.org/wiki/Cost_of_capital View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Cost_of_capitalView on Boundless.com Introduction to the Cost of Capital

47. Oil Prices Companies often use hedging techniques to offset price fluctuations for commodities. The fluctuation of oil prices can be seen in the above graph. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Oil.2001-2005jpg.smaller." CC BY-SA http://commons.wikimedia.org/wiki/File:Oil.2001-2005jpg.smaller.jpg View on Boundless.comCC BY-SAhttp://commons.wikimedia.org/wiki/File:Oil.2001-2005jpg.smaller.jpgView on Boundless.com Introduction to the Cost of Capital

48. CAPM-SML The Security Market Line for the Dow Jones Industrial Average over a 3 year period, with the x-axis representing beta and the y-axis representing expected return. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikibooks. "Principles of Finance/Section 1/Chapter 7/Capital Asset Pricing Model." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_Model View on Boundless.comCC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_ModelView on Boundless.com Introduction to the Cost of Capital

49. Cost of New Equity Cost of new equity equals dividends payed in year one divided by the current stock price, devalued by the amount of flotation cost, plus the growth rate. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Marginal cost of capital schedule." GNU FDL http://en.wikipedia.org/wiki/Marginal_cost_of_capital_schedule View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Marginal_cost_of_capital_scheduleView on Boundless.com Introduction to the Cost of Capital

50. Obtaining Required Return The capital asset pricing model is a good representation of how to obtain required return. It adds the risk-free rate to the risk premium of the market adjusted to an investment's beta. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Capital asset pricing model." GNU FDL http://en.wikipedia.org/wiki/Capital_asset_pricing_model View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Capital_asset_pricing_modelView on Boundless.com Introduction to the Cost of Capital

51. U.S. Corporate Taxes Effective U.S. corporate tax rates from 1947-2011. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "US Effective Corporate Tax Rate 1947-2011 v2." CC BY-SA http://commons.wikimedia.org/wiki/File%253AUS_Effective_Corporate_Tax_Rate_1947- 2011_v2.jpg View on Boundless.comCC BY-SAhttp://commons.wikimedia.org/wiki/File%253AUS_Effective_Corporate_Tax_Rate_1947- 2011_v2.jpgView on Boundless.com Introduction to the Cost of Capital

52. Union Camp Corporation Bond Certificate $25,000 Corporation Sinking Fund Bond Certificate. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "Union Camp Corporation - A Specimen "Sinking Fund" Bond Certificate c.1971." CC BY-SA http://commons.wikimedia.org/wiki/File:Union_Camp_Corporation_-_A_Specimen_%2522Sinking_Fund%2522_Bond_Certificate_c.1971.jpg View on Boundless.comCC BY-SA http://commons.wikimedia.org/wiki/File:Union_Camp_Corporation_-_A_Specimen_%2522Sinking_Fund%2522_Bond_Certificate_c.1971.jpgView on Boundless.com Introduction to the Cost of Capital

53. Present Value Equation To find the discounted present value of an asset, it is necessary to sum the discounted present value of each future cash flow (FV) at any time period (t) in years from the present time, using the appropriate interest rate (i). Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Discounted cash flow." GNU FDL http://en.wikipedia.org/wiki/Discounted_cash_flow View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Discounted_cash_flowView on Boundless.com Introduction to the Cost of Capital

54. Example Equation $10 in dividends. Current price of $100. Flotation cost of 3%. Growth rate of 5%. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Marginal cost of capital schedule." GNU FDL http://en.wikipedia.org/wiki/Marginal_cost_of_capital_schedule View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Marginal_cost_of_capital_scheduleView on Boundless.com Introduction to the Cost of Capital

55. U.S. Treasuries Yield Yields on 1-mont, 10-year, and 30-year U.S. government debt. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikimedia. "US Treasury bills and bonds yield." CC BY-SA http://commons.wikimedia.org/wiki/File%253AUS_Treasury_bills_and_bonds_yield.png View on Boundless.comCC BY-SAhttp://commons.wikimedia.org/wiki/File%253AUS_Treasury_bills_and_bonds_yield.pngView on Boundless.com Introduction to the Cost of Capital

56. IRR Investment Comparison A graph showing the decision between two exclusive investments based on IRR. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Internal rate of return." GNU FDL http://en.wikipedia.org/wiki/Internal_rate_of_return View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Internal_rate_of_returnView on Boundless.com Introduction to the Cost of Capital

57. Retention Rate The retention rate equals retained earnings divided by net income. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Retention ratio." GNU FDL http://en.wikipedia.org/wiki/Retention_ratio View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Retention_ratioView on Boundless.com Introduction to the Cost of Capital

58. Beta Equation The beta of an investment is equal to the covariance between the rate of return of the investment, r(a), and that of the portfolio, r(p). Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Beta (finance)." GNU FDL http://en.wikipedia.org/wiki/Beta_(finance) View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Beta_(finance)View on Boundless.com Introduction to the Cost of Capital

59. CAPM Method Expected return for a security equals the risk-free return for the market plus the beta for the security times its risk premium. Free to share, print, make copies and changes. Get yours at www.boundless.com Wikipedia. "Cost of capital." GNU FDL http://en.wikipedia.org/wiki/Cost_of_capital View on Boundless.comGNU FDLhttp://en.wikipedia.org/wiki/Cost_of_capitalView on Boundless.com Introduction to the Cost of Capital

60. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital The average cost of capital is: A) a benchmark for accepting or rejecting projects. B) fixed through time C) the same for all companies D) all of these

61. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/CC BY 3.0 http://www.saylor.org/majors/Business/ Introduction to the Cost of Capital The average cost of capital is: A) a benchmark for accepting or rejecting projects. B) fixed through time C) the same for all companies D) all of these

62. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital Which of the following explains the differences between a company's required return and its cost of capital? A) Required return measures business risk; cost of capital measures financial risk. B) Required return measures financial risk; cost of capital measures business risk. C) Required return is from the company's perspective; cost of capital from the investor's. D) Required return is from the investor's perspective; cost of capital from the company's.

63. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital Which of the following explains the differences between a company's required return and its cost of capital? A) Required return measures business risk; cost of capital measures financial risk. B) Required return measures financial risk; cost of capital measures business risk. C) Required return is from the company's perspective; cost of capital from the investor's. D) Required return is from the investor's perspective; cost of capital from the company's.

64. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital A company's cost of capital is used as a tool in relation to which aspect of financial policy? A) Diversifying a company's porfolio B) Valuing projects by discounting cash flows, and then selecting projects with the highest return. C) Hedging a company's investments. D) Evaluating a company's capital structure.

65. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital A company's cost of capital is used as a tool in relation to which aspect of financial policy? A) Diversifying a company's porfolio B) Valuing projects by discounting cash flows, and then selecting projects with the highest return. C) Hedging a company's investments. D) Evaluating a company's capital structure.

66. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital A company has a risk free rate of 3% and a risk premium of 6%. Its tax rate is 35%. What is the company's cost of debt? A) 5.85% B) 3.15% C) 3.9% D) 2.1%

67. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital A company has a risk free rate of 3% and a risk premium of 6%. Its tax rate is 35%. What is the company's cost of debt? A) 5.85% B) 3.15% C) 3.9% D) 2.1%

68. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital A company has issued preferred stock that are valued at $75 a share. The preferred dividend is $5. The company's growth rate is 5%. What is the cost of the company's preferred stock? A) 11.67% B) 6.67% C) 1.67% D) 5%

69. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital A company has issued preferred stock that are valued at $75 a share. The preferred dividend is $5. The company's growth rate is 5%. What is the cost of the company's preferred stock? A) 11.67% B) 6.67% C) 1.67% D) 5%

70. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital A company issues common equity and has a beta of 1.5. The risk free return is 3% and the market return is 7%. What is the company's cost of common equity? A) 6% B) 7% C) 9% D) 13.5%

71. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital A company issues common equity and has a beta of 1.5. The risk free return is 3% and the market return is 7%. What is the company's cost of common equity? A) 6% B) 7% C) 9% D) 13.5%

72. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital A company has retained earnings of $1.5 million and net income of $8 million. What is the retention rate? A) 0.1875 B).08125 C) 0.8125. D).01875.

73. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital A company has retained earnings of $1.5 million and net income of $8 million. What is the retention rate? A) 0.1875 B).08125 C) 0.8125. D).01875.

74. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital A company is thinking of issuing more common stock. Its stock's current market price is $50 a share with a dividend of $3 a share. The company has a 5% growth rate and a flotation cost of 10%. What is the company cost of new common stock? A) 6.67% B) 65% C) 16.3% D) 11.67%

75. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital A company is thinking of issuing more common stock. Its stock's current market price is $50 a share with a dividend of $3 a share. The company has a 5% growth rate and a flotation cost of 10%. What is the company cost of new common stock? A) 6.67% B) 65% C) 16.3% D) 11.67%

76. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital A company has a risk free rate of 3%. The market rate of return is 8% and the company has a beta of 2. What is the company's expected rate of return? A) 8% B) 19% C) 13% D) 10%

77. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital A company has a risk free rate of 3%. The market rate of return is 8% and the company has a beta of 2. What is the company's expected rate of return? A) 8% B) 19% C) 13% D) 10%

78. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital In the capital asset pricing model (CAPM), you derive a stock’s: A) Beta B) Expected return (or cost of capital) C) Equity Premium D) Beta, expected return (or cost of capital), and equity premium

79. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/CC BY 3.0http://www.saylor.org/majors/Business/ Introduction to the Cost of Capital In the capital asset pricing model (CAPM), you derive a stock’s: A) Beta B) Expected return (or cost of capital) C) Equity Premium D) Beta, expected return (or cost of capital), and equity premium

80. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital In order to compute the statistical values in the capital asset pricing model (CAPM), you need information over time about: A) The rate of return of a risk-free asset, the overall stock market return, and a company's rate of return. B) a rate of return from a risk-free asset (like the 90-day U.S. Treasury bill rate). C) an overall stock market rate of return. D) a company’s rate of return.

81. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/CC BY 3.0 http://www.saylor.org/majors/Business/ Introduction to the Cost of Capital In order to compute the statistical values in the capital asset pricing model (CAPM), you need information over time about: A) The rate of return of a risk-free asset, the overall stock market return, and a company's rate of return. B) a rate of return from a risk-free asset (like the 90-day U.S. Treasury bill rate). C) an overall stock market rate of return. D) a company’s rate of return.

82. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital Which of the following interpretations of data related to a Security Market Line (SML) is correct? A) If an asset is priced at a point above the SML it is overvalued. B) If an asset is priced at a point below the SML, it is undervalued. C) All of these answers. D) If an asset's value lies on the SML, it is correctly priced.

83. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital Which of the following interpretations of data related to a Security Market Line (SML) is correct? A) If an asset is priced at a point above the SML it is overvalued. B) If an asset is priced at a point below the SML, it is undervalued. C) All of these answers. D) If an asset's value lies on the SML, it is correctly priced.

84. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital A company makes an initial $10,000 investment in a project. This project is projected to earn $8000 in year one, $10,000 in year 2, $12,000 in year 3, and $20,000 in year 4. If the interest rate is 5%, what is the project's present value? A) $33,509 B) $43,509 C) $40,000 D) $37,619

85. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital A company makes an initial $10,000 investment in a project. This project is projected to earn $8000 in year one, $10,000 in year 2, $12,000 in year 3, and $20,000 in year 4. If the interest rate is 5%, what is the project's present value? A) $33,509 B) $43,509 C) $40,000 D) $37,619

86. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital Which of the following is NOT an element in the bond yield plus risk premium approach? A) The company's CAPM. B) The future cash flows from the benchmark bond. C) The current yield of a 10-year U.S. Treasury Bond. D) The benchmark bond's internal rate of return.

87. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital Which of the following is NOT an element in the bond yield plus risk premium approach? A) The company's CAPM. B) The future cash flows from the benchmark bond. C) The current yield of a 10-year U.S. Treasury Bond. D) The benchmark bond's internal rate of return.

88. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital Which of the following is NOT a way weighted average cost of capital (WACC) is used to analyze a company's financial activities? A) WACC is the rate a company is expected to pay, on average, to its security holders. B) WACC influences how a company's capital structure is balanced. C) WACC is the minimum rate of return a company must earn on a new venture. D) All of these answers.

89. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital Which of the following is NOT a way weighted average cost of capital (WACC) is used to analyze a company's financial activities? A) WACC is the rate a company is expected to pay, on average, to its security holders. B) WACC influences how a company's capital structure is balanced. C) WACC is the minimum rate of return a company must earn on a new venture. D) All of these answers.

90. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital Suppose that a company has total financing where 10% comes from bonds, 10% from a loan, and 80% from shareholders’ equity. The bonds pay on average a 10% interest rate, the loan has a 10% interest rate, and shareholders require a 10% return. The interest payment on the loan is tax deductible and the tax rate is 20%. What is the simple average cost of capital equal to? A) 0.0933 B) 0.0333 C) 0.0733 D) 0.1

91. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/CC BY 3.0 http://www.saylor.org/majors/Business/ Introduction to the Cost of Capital Suppose that a company has total financing where 10% comes from bonds, 10% from a loan, and 80% from shareholders’ equity. The bonds pay on average a 10% interest rate, the loan has a 10% interest rate, and shareholders require a 10% return. The interest payment on the loan is tax deductible and the tax rate is 20%. What is the simple average cost of capital equal to? A) 0.0933 B) 0.0333 C) 0.0733 D) 0.1

92. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital Suppose that a company has total financing where 10% comes from bonds, 10% from a loan, and 80% from shareholders’ equity. The bonds pay on average a 10% interest rate, the loan has a 10% interest rate, and shareholders require a 10% return. What is the weighted average cost of capital (WACC) equal to? A) 0.0333 B) 0.3 C) 0.1 D) 0.3333

93. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Saylor OER. "Business Administration « Saylor.org – Free Online Courses Built by Professors." CC BY 3.0 http://www.saylor.org/majors/Business/CC BY 3.0http://www.saylor.org/majors/Business/ Introduction to the Cost of Capital Suppose that a company has total financing where 10% comes from bonds, 10% from a loan, and 80% from shareholders’ equity. The bonds pay on average a 10% interest rate, the loan has a 10% interest rate, and shareholders require a 10% return. What is the weighted average cost of capital (WACC) equal to? A) 0.0333 B) 0.3 C) 0.1 D) 0.3333

94. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital The weighted average cost of capital "weighting" is based on _____. A) the market value of the company's debt and equity. B) the book value of the company's debt and equity. C) the company's tax rate. D) the company's returns on equity and debt.

95. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital The weighted average cost of capital "weighting" is based on _____. A) the market value of the company's debt and equity. B) the book value of the company's debt and equity. C) the company's tax rate. D) the company's returns on equity and debt.

96. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital Which of the following correctly explains how a specific factor can influence a company's weighted average cost of capital? A) Increasing the amount of debt generally improves performance and increases return on equity. B) If a company increases it dividends, it leads to an increase in its WACC. C) Increased fixed costs will decrease a company's WACC. D) All of these answers.

97. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital Which of the following correctly explains how a specific factor can influence a company's weighted average cost of capital? A) Increasing the amount of debt generally improves performance and increases return on equity. B) If a company increases it dividends, it leads to an increase in its WACC. C) Increased fixed costs will decrease a company's WACC. D) All of these answers.

98. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital Which of the following are factors that influence the weighted average cost of capital (WACC) calculation and is external to the firm? A) The corporate tax rate. B) Changes in interest rates. C) The conditions in the stock market. D) All of these answers.

99. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital Which of the following are factors that influence the weighted average cost of capital (WACC) calculation and is external to the firm? A) The corporate tax rate. B) Changes in interest rates. C) The conditions in the stock market. D) All of these answers.

100. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital A company is considering investing in a project that requires the company to take on risks outside of the company's current scope. As a result, which of the following things will happen? A) The company does not have to recalculate its WACC to evaluate the project. B) The project would decrease the company's cost of equity. C) All of these things. D) The company's stock value would drop unless the project increase the company's expected returns.

101. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital A company is considering investing in a project that requires the company to take on risks outside of the company's current scope. As a result, which of the following things will happen? A) The company does not have to recalculate its WACC to evaluate the project. B) The project would decrease the company's cost of equity. C) All of these things. D) The company's stock value would drop unless the project increase the company's expected returns.

102. Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital Which of the following is a problem associated with using the weighted average cost of capital? A) All of these answers. B) The calculation is not exact as at least one component is an estimate. C) WACC will vary for the same business based on which method you use. D) It may be difficult to find a risk-free rate that corresponds to the investment being analyzed.

103. Free to share, print, make copies and changes. Get yours at www.boundless.comwww.boundless.com Boundless - LO. "Boundless." CC BY-SA 3.0 http://www.boundless.com/CC BY-SA 3.0http://www.boundless.com/ Introduction to the Cost of Capital Which of the following is a problem associated with using the weighted average cost of capital? A) All of these answers. B) The calculation is not exact as at least one component is an estimate. C) WACC will vary for the same business based on which method you use. D) It may be difficult to find a risk-free rate that corresponds to the investment being analyzed.

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105. Wikibooks. "Principles of Finance/Section 1/Chapter 5/Risk/Risk." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_5/Risk/RiskCC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_5/Risk/Risk OER Commons. CC BY http://www.oercommons.org/courses/15-433-investments-spring-2003/viewCC BYhttp://www.oercommons.org/courses/15-433-investments-spring-2003/view Wiktionary. "systematic risk." CC BY-SA 3.0 http://en.wiktionary.org/wiki/systematic+riskCC BY-SA 3.0http://en.wiktionary.org/wiki/systematic+risk Wiktionary. "beta." CC BY-SA 3.0 http://en.wiktionary.org/wiki/betaCC BY-SA 3.0http://en.wiktionary.org/wiki/beta Wikipedia. "Unsystematic risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Unsystematic%20riskCC BY-SA 3.0http://en.wikipedia.org/wiki/Unsystematic%20risk Wikipedia. "Security market line." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Security_market_lineCC BY-SA 3.0http://en.wikipedia.org/wiki/Security_market_line Wikibooks. "Principles of Finance/Section 1/Chapter 7/Capital Asset Pricing Model." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_ModelCC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_Model Wiktionary. "slope." CC BY-SA 3.0 http://en.wiktionary.org/wiki/slopeCC BY-SA 3.0http://en.wiktionary.org/wiki/slope Wikibooks. "Principles of Finance/Section 1/Chapter 7/Capital Asset Pricing Model." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_ModelCC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_7/Capital_Asset_Pricing_Model Wikipedia. "Time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Time_value_of_moneyCC BY-SA 3.0http://en.wikipedia.org/wiki/Time_value_of_money Wikipedia. "Discounted cash flow." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Discounted_cash_flowCC BY-SA 3.0http://en.wikipedia.org/wiki/Discounted_cash_flow Wikipedia. "Terminal value (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Terminal_value_(finance)CC BY-SA 3.0http://en.wikipedia.org/wiki/Terminal_value_(finance) Wiktionary. "discount rate." CC BY-SA 3.0 http://en.wiktionary.org/wiki/discount+rateCC BY-SA 3.0http://en.wiktionary.org/wiki/discount+rate Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/projection-periodCC BY-SA 3.0http://www.boundless.com//finance/definition/projection-period OER Commons. CC BY http://www.oercommons.org/courses/entrepreneurial-finance-spring-2011/viewCC BYhttp://www.oercommons.org/courses/entrepreneurial-finance-spring-2011/view OER Commons. CC BY http://www.oercommons.org/courses/real-estate-finance-and-investment-fall-2006/viewCC BYhttp://www.oercommons.org/courses/real-estate-finance-and-investment-fall-2006/view Wikipedia. "time value of money." CC BY-SA 3.0 http://en.wikipedia.org/wiki/time%20value%20of%20moneyCC BY-SA 3.0http://en.wikipedia.org/wiki/time%20value%20of%20money Wikipedia. "Internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_rate_of_returnCC BY-SA 3.0http://en.wikipedia.org/wiki/Internal_rate_of_return Wikipedia. "Cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_capitalCC BY-SA 3.0http://en.wikipedia.org/wiki/Cost_of_capital Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital

106. Wiktionary. "benchmark." CC BY-SA 3.0 http://en.wiktionary.org/wiki/benchmarkCC BY-SA 3.0http://en.wiktionary.org/wiki/benchmark Wiktionary. "capital." CC BY-SA 3.0 http://en.wiktionary.org/wiki/capitalCC BY-SA 3.0http://en.wiktionary.org/wiki/capital OER Commons. CC BY http://www.oercommons.org/courses/15-414-financial-management-summer-2003/viewCC BYhttp://www.oercommons.org/courses/15-414-financial-management-summer-2003/view OER Commons. CC BY-SA http://www.oercommons.org/courses/management-of-capital/viewCC BY-SAhttp://www.oercommons.org/courses/management-of-capital/view Wiktionary. "covariance." CC BY-SA 3.0 http://en.wiktionary.org/wiki/covarianceCC BY-SA 3.0http://en.wiktionary.org/wiki/covariance Wikipedia. "Securities market." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Securities_market#Preferred_stockCC BY-SA 3.0http://en.wikipedia.org/wiki/Securities_market#Preferred_stock Wikipedia. "Preferred stock." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Preferred_stockCC BY-SA 3.0http://en.wikipedia.org/wiki/Preferred_stock Wikispaces. "SU3FINANCE - Chapter 12 - Determining the Cost of Capital." CC BY-SA http://su3finance.wikispaces.com/Chapter+12+-+Determining+the+Cost+of+CapitalCC BY-SA http://su3finance.wikispaces.com/Chapter+12+-+Determining+the+Cost+of+Capital Wikipedia. "hybrid instrument." CC BY-SA 3.0 http://en.wikipedia.org/wiki/hybrid%20instrumentCC BY-SA 3.0http://en.wikipedia.org/wiki/hybrid%20instrument OER Commons. CC BY http://www.oercommons.org/courses/management-of-capital/viewCC BYhttp://www.oercommons.org/courses/management-of-capital/view Wikipedia. "Internal financing." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Internal_financingCC BY-SA 3.0http://en.wikipedia.org/wiki/Internal_financing Wikipedia. "Retained earnings." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Retained_earningsCC BY-SA 3.0http://en.wikipedia.org/wiki/Retained_earnings Wikipedia. "Retention ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Retention_ratioCC BY-SA 3.0http://en.wikipedia.org/wiki/Retention_ratio Wikipedia. "dividend payout ratio." CC BY-SA 3.0 http://en.wikipedia.org/wiki/dividend%20payout%20ratioCC BY-SA 3.0http://en.wikipedia.org/wiki/dividend%20payout%20ratio Wikipedia. "Cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_capitalCC BY-SA 3.0http://en.wikipedia.org/wiki/Cost_of_capital Wikipedia. "Cost of equity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_equityCC BY-SA 3.0http://en.wikipedia.org/wiki/Cost_of_equity Wiktionary. "beta." CC BY-SA 3.0 http://en.wiktionary.org/wiki/betaCC BY-SA 3.0http://en.wiktionary.org/wiki/beta OER Commons. CC BY http://www.oercommons.org/courses/management-of-capital/viewCC BYhttp://www.oercommons.org/courses/management-of-capital/view Wikipedia. "Market value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Market_valueCC BY-SA 3.0http://en.wikipedia.org/wiki/Market_value Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital

107. Wikipedia. "Balance sheet." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Balance_sheetCC BY-SA 3.0http://en.wikipedia.org/wiki/Balance_sheet Wikipedia. "Weighted average cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Weighted_average_cost_of_capitalCC BY-SA 3.0http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital Wikipedia. "Book value." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Book_valueCC BY-SA 3.0http://en.wikipedia.org/wiki/Book_value Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//management/definition/synergyCC BY-SA 3.0http://www.boundless.com//management/definition/synergy Wikipedia. "Bond (finance)." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Bond_(finance)#YieldCC BY-SA 3.0http://en.wikipedia.org/wiki/Bond_(finance)#Yield Wikipedia. "Risk premium." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Risk_premiumCC BY-SA 3.0http://en.wikipedia.org/wiki/Risk_premium Wikipedia. "Yield to maturity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_to_maturityCC BY-SA 3.0http://en.wikipedia.org/wiki/Yield_to_maturity Wikispaces. CC BY-SA http://tradingdiary.wikispaces.com/Market+Valuation+%2528Price-2-Earnings+Ratio%2529CC BY-SAhttp://tradingdiary.wikispaces.com/Market+Valuation+%2528Price-2-Earnings+Ratio%2529 Wikipedia. "coupon payment." CC BY-SA 3.0 http://en.wikipedia.org/wiki/coupon%20paymentCC BY-SA 3.0http://en.wikipedia.org/wiki/coupon%20payment Wikipedia. "dividend yield." CC BY-SA 3.0 http://en.wikipedia.org/wiki/dividend%20yieldCC BY-SA 3.0http://en.wikipedia.org/wiki/dividend%20yield Boundless Learning. "Boundless." CC BY-SA 3.0 http://www.boundless.com//finance/definition/principal-paymentCC BY-SA 3.0http://www.boundless.com//finance/definition/principal-payment Wikipedia. "Weighted average cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Weighted_average_cost_of_capitalCC BY-SA 3.0http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital Wiktionary. "proxy fight." CC BY-SA 3.0 http://en.wiktionary.org/wiki/proxy+fightCC BY-SA 3.0http://en.wiktionary.org/wiki/proxy+fight Wiktionary. "proxy." CC BY-SA 3.0 http://en.wiktionary.org/wiki/proxyCC BY-SA 3.0http://en.wiktionary.org/wiki/proxy ICTQatar. CC BY-SA http://www.ictqatar.qa/sites/default/files/documents/2011%2520WACC%2520Consultation%2520Document%2520v0%252009 %2520final.pdfCC BY-SA http://www.ictqatar.qa/sites/default/files/documents/2011%2520WACC%2520Consultation%2520Document%2520v0%252009 %2520final.pdf OER Commons. CC BY http://www.oercommons.org/courses/management-of-capital/viewCC BYhttp://www.oercommons.org/courses/management-of-capital/view OER Commons. CC BY http://www.oercommons.org/courses/management-of-capital/viewCC BYhttp://www.oercommons.org/courses/management-of-capital/view Wikipedia. "Capital structure." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_structureCC BY-SA 3.0http://en.wikipedia.org/wiki/Capital_structure Wikipedia. "Credit Risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Credit_RiskCC BY-SA 3.0http://en.wikipedia.org/wiki/Credit_Risk Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital

108. Wiktionary. "default." CC BY-SA 3.0 http://en.wiktionary.org/wiki/defaultCC BY-SA 3.0http://en.wiktionary.org/wiki/default Wikipedia. "business risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/business%20riskCC BY-SA 3.0http://en.wikipedia.org/wiki/business%20risk Wikipedia. "financial risk." CC BY-SA 3.0 http://en.wikipedia.org/wiki/financial%20riskCC BY-SA 3.0http://en.wikipedia.org/wiki/financial%20risk Wikipedia. "Cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_capitalCC BY-SA 3.0http://en.wikipedia.org/wiki/Cost_of_capital Wikipedia. "Weighted average cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Weighted_average_cost_of_capitalCC BY-SA 3.0http://en.wikipedia.org/wiki/Weighted_average_cost_of_capital Wikibooks. "Principles of Finance/Section 1/Chapter 6/Corp/WACC." CC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_6/Corp/WACCCC BY-SA 3.0 http://en.wikibooks.org/wiki/Principles_of_Finance/Section_1/Chapter_6/Corp/WACC Wikipedia. "Capital intensity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Capital_intensityCC BY-SA 3.0http://en.wikipedia.org/wiki/Capital_intensity Wiktionary. "retained earnings." CC BY-SA 3.0 http://en.wiktionary.org/wiki/retained+earningsCC BY-SA 3.0http://en.wiktionary.org/wiki/retained+earnings ICTQatar. CC BY-SA http://www.ictqatar.qa/sites/default/files/documents/2011%2520WACC%2520Consultation%2520Document%2520v0%252009 %2520final.pdfCC BY-SA http://www.ictqatar.qa/sites/default/files/documents/2011%2520WACC%2520Consultation%2520Document%2520v0%252009 %2520final.pdf OER Commons. CC BY http://www.oercommons.org/courses/management-of-capital/viewCC BYhttp://www.oercommons.org/courses/management-of-capital/view OER Commons. CC BY http://www.oercommons.org/courses/management-of-capital/viewCC BYhttp://www.oercommons.org/courses/management-of-capital/view Wikipedia. "Cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_capitalCC BY-SA 3.0http://en.wikipedia.org/wiki/Cost_of_capital Wikipedia. "Federal Reserve System." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Federal_Reserve_SystemCC BY-SA 3.0http://en.wikipedia.org/wiki/Federal_Reserve_System Wiktionary. "inflation." CC BY-SA 3.0 http://en.wiktionary.org/wiki/inflationCC BY-SA 3.0http://en.wiktionary.org/wiki/inflation Wikipedia. "lobbying." CC BY-SA 3.0 http://en.wikipedia.org/wiki/lobbyingCC BY-SA 3.0http://en.wikipedia.org/wiki/lobbying OER Commons. CC BY http://www.oercommons.org/courses/management-of-capital/viewCC BYhttp://www.oercommons.org/courses/management-of-capital/view Wikipedia. "Corporate bond." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Corporate_bondCC BY-SA 3.0http://en.wikipedia.org/wiki/Corporate_bond Wikipedia. "Yield to maturity." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Yield_to_maturityCC BY-SA 3.0http://en.wikipedia.org/wiki/Yield_to_maturity Wikipedia. "Cost of capital." CC BY-SA 3.0 http://en.wikipedia.org/wiki/Cost_of_capitalCC BY-SA 3.0http://en.wikipedia.org/wiki/Cost_of_capital Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital

109. Wiktionary. "risk." CC BY-SA 3.0 http://en.wiktionary.org/wiki/riskCC BY-SA 3.0http://en.wiktionary.org/wiki/risk Wiktionary. "maturity." CC BY-SA 3.0 http://en.wiktionary.org/wiki/maturityCC BY-SA 3.0http://en.wiktionary.org/wiki/maturity Wikipedia. "internal rate of return." CC BY-SA 3.0 http://en.wikipedia.org/wiki/internal%20rate%20of%20returnCC BY-SA 3.0http://en.wikipedia.org/wiki/internal%20rate%20of%20return Free to share, print, make copies and changes. Get yours at www.boundless.com Introduction to the Cost of Capital