FM Chapter 17 Questions – The cost of capital
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QN5. the issued share is supposed to be. 200,000/0.5= 400,000.
Help me to understand. Sir
$0.50 is the nominal (par) value per share.That is not the market value, which is $2.40 per share.
The question says that there are 200,000 shares.
shouldn’t the market value be (200,000/0.50)*$2.40 ? why did’t you consider nominal value
There are 200,000 shares. The MV is $2.40 per share. Therefore the total market value if 200,000 x $2.40 = $480,000. The nominal value is of no relevance.
(Have you watched the free lectures on the calculation of the WACC?)
Hi sir, where does the 7 per annum in q3 come from?
The coupon rate is 10%, there is tax at 30%, so the net interest cost to the company on $100 nominal is 70% x 10 = 7 per year.
Did you watch the free lectures on this before attempting the test?
Nice Test
🙂
Sir i am not getting 5 percent growth rate in question 2. Kindly help. When i take root (36/33.1)^.3333 i get different answer.
I don’t know where you are getting 33.1 from.
It should be (36/31.1)^0.33333 – 1 = 0.05 (or 5%)
sir in question 3 ,
I don’t get why we multiply 36 by 1.05
why do we not just divide 36 by 540 and then add the 0.05
sorry i meant question2
Because that is what the formula provided on the formula sheet requires!! Did you not watch the free lectures first?
Sir there is an issue with the question 3 answer. The annuity df for 5 yrs is 3.791, not 3.761 as you stated in a previous comment. The npv @10% is $ -4.847 .The irr will come to 12.89%
The npv @10% is *$ + 4.847
I assume that you are referring to my comment from 2017. There was indeed a mistake in my comment and I have now corrected it. The IRR is not 12.89% however. It is 11.45%.