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Study Session 10: Corporate Finance: Corporate Governance, Capital Budgeting, and Cost of Capital

reading 35 - part practice question 22

Hi, I am having some issues calculating the cost of debt for the below :

Currently outstanding bonds     $2.4 million five-year bonds, coupon of 12.5 percent, with a market value of $2.156 million

The solution presented in the curriculum is as follows :

For debt: FV = 2,400,000; PV = 2,156,000; n = 10; PMT = 150,000

Solve for i. i = 0.07748. YTM = 15.5%

However , I am not getting the 0.07748 but a negative rate.

please help :)

CFA L1 Question about the questions on the exam!

Hello guys, a friend of mine ,giving the l1 exam on June, asked me about the questions of l1. He asked if a question could be a combination of different study sessions,

For example.If i have to calculate the growth rate on Corp Finance which is  (1-D/EPS)xROE and the ROE is not given but i have the following information   ……Net Income = x     and AVG Equity = y   so ROE = x/y………..But this ratio is given on FRA and not on Corp Finance. So is each section a thing of its own or there can be questions that you have to combine knowledge from many study sessions?

Thank you

Cost of Capital Question (EOC Reading 35, Q12)

This is the answer given in the solutions for EOC Reading 35, Q12:

B is correct.

  • Capital structure:

    Market value of debt: FV = $10,000,000, PMT = $400,000, N = 10,

    I/YR = 13.65%. Solving for PV gives the answer $7,999,688  (I can’t seem to get PV equal to this)

    Market value of equity: 1.2 million shares outstanding at $10 = $12,000,000

    Market value of debt
    $7,999,688
     
    40%

Risk-Adjusted Profitability Measures (RAPM) questions..

Not really a CFA topic i guess but this is the best forum i can find for me to ask question, so thanks a lot! smiley

For anyone who studied about Financial Intermediation before. (Might wanna read my notes under each question first to understand my point of view)

With regards to commercial banks,

AAPL's exposure to the market

Hello everyone,

I ran across an article explaining why and how significant AAPL’s earnings expectations are to the market, I have one question:

The article says AAPL has a 3 month Beta of 0.76, 0.82, and 0.78 with respect to the indexes of DJIA, Nasdaq 100, and S&P 500. The article ends with saying the markets exposure to AAPL is crucial.

My question is, isnt the article supposed to say AAPL’s exposure to the market? As for example, if AAPL moves up 1%, the market wont move 0.76%, 0.82%, or 0.78%. Or am I mistaken? 

Resolved

I have a question for one of the practice problems in the back of Reading 34. Question 14 states that Wilson Flannery is concerned that this project has multiple IRRs and provides the cash flows as -50 in year 0, 100 in year 1, and -50 in year 3. No cash flow in year 2. It asks how many discount rates produce a zero NPV for this project?

Then the options are:

A) One a discount rate of 0%.

B) Two, discount rates of 0 and 32%.

C) Two, discount rates of 0 and 62%.

What is the term for this rate?

Can someone please help me clarify something about rate of returns. 

Let say I lend money to someone $100 for 5 years at 12% per year. 

If I lend it at annual amortization, I will get $12 in the first year as interest. My return on capital is 12%.

If I lend it at monthly amortization, I will get $10.28 in interest in the first year. My return on capital 10.28%

What is the 10.28% called? 

Floatation cost

Below is the question and answer provided by CFA Practice

A company intends to issue new common stock with floatation costs of 5.0% per share. The expected dividend next year is $0.32, and the dividend growth rate is expected to be 10% in perpetuity. Assuming the shares are issued at a price of $14.69, the cost (%) of external equity for the firm is closest to

0.1229     =     [$0.32$14.69(1−0.05)]+0.10

I feel confused that CFA suggest the floatation cost seen as one time charge at T=0 , if the answer provided by CFA institute is not correct?

debt raising

Hi guys!

Could you please help me with the example below. I’m not sure how to approach this kind of tasks.

“GT company is rated by a rating agency. In order to maintain its current ratings GT need to comply with the covenant of EBITDA/interest of at least 10x. Using the following data, calculate how much additional debt can the company raise?

Sales
4000

EBITDA
700

Interest expenses
60

Capital expenditure
180

Changes in working capital
-18

Tax rate 
0,2