Question

A company has financed an investment entirely by issuing a bond. Then, which component of the bond represents the cost of capital for the firm?

		YTM
		Dividend Rate
		Sunk Costs
		None

Which of the following is a non-systematic risk?

		Inflation risk
		Risk of unexpected strike by the employees of a company.
		Interest rate risk
		All

Flotation Cost is the cost of selling a security and therefore it needs to be taken into account in the cost of capital calculations.

True

False

The amount owed to suppliers also falls under the umbrella of equity financing.

True

False

Answer 1

1).

a. YTM

If entire financing is done by issuing a bond, the cost of capital will be same as on the return on the bond, which is Yield to Maturity (YTM)

2).

b. Risk of unexpected strike by the employees of a company.

The unexpected risk of strike by the employees of a company is specific to the company and comes under non-systematic risk. Inflation and Interest rate risk falls under systematic risk.

3).

True

Higher Flotation costs will result in Higher Weighted average Cost of Capital. So, Floation costs affects cost of capital and needs to be taken into its calculations.

4).

False

Equity financing results in the investor becoming an owner rathen than a creditor. So, Amount owed to suppliers wont come under equity financing, as it is not the case.