Question

Which of these best explain why you would calculate a company's cost of capital and use it as the discount rate for evaluating a potential investment?

                a.This approach best reflects the risk profile of the company

                b.It is required by the Securities and Exchange Commission

                c.It is fun to write Excel formulas to calculate it

The price of ABC Corp. stock was $100 per share on Jan. 1, 2018 and $110 on Dec. 31, 2018. The total return for ABC stock was 10% in 2018. What was the dividend yield?"

                a.10%

                b.No dividends were paid

                c.Need more information to answer this question

A $1,000 par value bond has a 5% fixed interest rate paid semi-annually. What amount will the bondholder receive as the first coupon payment?"

                a.$50

                b.$25

                c.$100

Which of the three steps of evaluating an investment is typically the most challenging and requires the most skill?

                a.Estimate the relevant cash flows

                b.Calculate a figure of merit for the investment

                c.Compare figure of merit to an acceptance criterion

If a company borrows too much money it can face financial distress costs. Which of these are an example of a distress cost?

                a.Lost sales due to customer's concern about the finances of the company

                b.Market signaling

                c.The tax benefits of borrowing money

Answer 1

1. This approach best reflects the risk profile of the company and helps firms to make better capital budgeting decisions.
2. Need more information to answer this question- Need info on divident amount paid to calculate the yield.
3. $25 =1000*5%/2 = 1000*2.5/100 because it is semi annualy.
4. Estimate the relevant cash flows- It requires you to have the required financial skillset to analyse the cash flows appropriately.
5. The tax benefits of borrowing money- there are benefits for tax, however, the interest component also pose a risk.

If your query has been solved, please like the answer. Thanks!