A firm has achieved an average growth in dividends over the last five years of 10.5% per year. It is now widely believed that the long-run average annual dividend growth rate will be 9.16% per year. The firm’s current dividend yield is 4.8%.What is the firm’s cost of equity?
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1 .Which three elements are needed to estimate the cost of equity using the dividend growth model?
A Current dividends per share, expected growth rate in earnings per share and currentmarket price per share B Current earnings per share, expected growth rate in dividends per share and currentmarket price per share C Current earnings per share, expected growth rate in earnings per share and current...
2 .A firm has a share price of $30, a forecast dividend per share after one year of $3 and thereafter an expected growth rate of 10%.What is the firm’s cost of equity?
A 21.1% B 12.2% C 11.0% D 20.0%
3 .A firm has a bank loan with a 10% interest rate. The firm also has in issue 8% preference shares trading at par and has estimated that its cost of ordinary shares is 18%. The firm has a 30% tax rate.What is the weighted average cost of capital if the firm uses a capital structure comprising 50% debt and an even split between preference and ordinary shares?
A 11.50% B 10.00% C 9.40% D 8.05%
4 .A firm’s weighted average cost of capital is minimised when its debt to equity ratio is 4:1.Which of the following statements is most accurate?
A The value of the firm is maximised when it uses more equity than debt B A higher ratio than 4:1 means debt holders will require a lower return C A higher ratio than 4:1 means equity holders will require a higher return D The value of the firm will be maximised if it is 75% debt financed
5 .
A 13.8% B 15.2% C 15.7% D 23.8%
7 .Which of the following statements concerning capital structure theory is correct?
A In the traditional view, there is a linear relationship between the cost of equity andfinancial risk B Modigliani and Miller said that, in the absence of tax, the cost of equity wouldremain constant C Pecking order theory does not suggest an optimal debt to equity ratio D Modigliani and Miller sai...
8 .Colt Co has an equity beta factor of 1.15 and an asset beta factor of 0.85. The risk-free rate ofreturn is 8.5% and the market return is estimated at 12.4%. The corporate tax rate is 25%.What is Colt’s cost of equity geared?
A 11.82% B 12.99% C 9.74% D 14.26%
9 .The risk-free rate of return is 3% and the market premium is 6.5%. A firm’s equity beta is 1.15 and asset beta 0.85.What will the firm’s cost of equity be if it redeems all outstanding debt?
A 7.0% B 10.5% C 8.5% D 6.0%
10 .A firm’s equity beta is 1.10 and its asset beta is 0.85. The market premium is 4.50% and the risk-free rate 3%What is the firm’s cost of equity geared?
A 7.95% B 4.65% C 6.83% D 4.28%
