SUMMARY8
Describe the benefits of debt financing.
Explain why the cost of capital for preferred stock will usually be lower than the cost of capital for common stock.
What actions might be taken to estimate the risk premium for determining the cost of capital for common stock?
How does the weighted-average cost of capital change with additional debt?
Describe a situation in which a company might decide to avoid additional debt.
When a company takes on additional debt, how might that be viewed by stockholders?
Why is the optimal capital structure considered a range of debt-to-equity proportions rather than a specific combination of debt to equity?
If a company was planning to expand its business activities into an additional region of the world, would you recommend the use of debt or equity financing? Explain your answer.
Since inflation can influence the risk associated with cost of capital, describe how higher prices might affect the required rate of return of an investor.
Calculate the after-tax cost of debt based on an interest rate of 6% with a 30% tax rate.
What would be the cost of capital for preferred stock with a market price of SAR 45 and a dividend of SAR 2.70?
A company plans to issue additional preferred stock. If they plan a preferred cost of capital of 9% and the current market price is SAR 90,
Calculate the risk premium using CAPM with these amounts:
Using the dividend growth equation, what would be the cost of equity based on these amounts?
Based on these amounts, what would be the weighted-average cost of capital?
A company has this capital structure:
Cost of capital is also considered the required rate of return of the lenders and investors.
10. Determining the cost of equity is easier than determining the cost of debt.
Match the terms listed with their definitions. Write the letters of the correct definitions.
KEY FORMULAS
Cost of Capital for Debt
What factors should the company consider before taking on additional debt?
How might the additional debt affect the cost of capital for the company?
Cost of Capital for Common Stock
Why is the required return for a common stock investment viewed as an opportunity cost?
Which of the three methods would provide Malak with the best
Weighted Average Cost of Capital
Using the Dividend-Growth Model formula, calculate the ke based on these amounts:
Calculate the weighted-average cost of capital based on the ke from (a) along with a kd of 7% and these capital structure proportions:
What additional actions might Layla consider in the future to reduce the cost of capital for the company?
CASE STUDY: COST OF CAPITAL FOR EXPANDED GLOBAL BUSINESS ACTIVITIES
For the planned business expansion, would you recommend that
Explain how one or more quantitative and qualitative factors might affect the cost of capital for the food and beverage company.
Starting with a base cost of capital in Saudi Arabia of 4% and using the
Research online methods used by Saudi companies to determine the cost of
