FIN 6100 Exam 2 Questions and Answers Already Passed Latest Update

FIN 6100 Exam 2 Questions and Answers Already Passed Latest Update What is the cost of capital? - Answers the overall interest rate that companies pay to finance operations and the purchase of assets. What happens if a company is earning more than their WACC rate? Less than? - Answers more: they are increasing the value of its equity less: losing value for shareholders WACC formula? What do the different parts stand for? - Answers WACC = WdKd(1-T) + WeKe Wd: weight of debt Kd: cost of debt (interest rate) T: Tax shield (cost of debt after interest) We: weight of equity Ke: return on equity What does the cost of debt mean? - Answers the interest rate we would expect to pay on borrowed funds (Kd) What is the best way to measure cost of debt? - Answers Bonds Terms to know Maturity/term Remaining term Face Value Coupon Payment - Answers maturity/term: total life of the bond from origination to termination remaining term: how much time until maturity face value: amount of money returned when the bond matures Coupon Payment: amount paid periodically to buyer. coupon payment formula - Answers payment = face value (FV) x coupon rate Where are the terms of a bond set? what does it include? (4) - Answers in the Indenture contract 1. coupon rate and frequency 2. options attached 3. maturity 4. face value what is a "zero" bond? - Answers one with a coupon rate of 0. No payments are made to the buyer. Is this a premium or discount bond? Interest rate Coupon rate - Answers Premium What kind of bond is this? Coupon rate = Current market yield - Answers Par Value bond. It will sell for exactly the face value. Price Vs. Yield relationship 1. Return Coupon rate? 2. return coupon rate 3. Return = Coupon rate - Answers 1. price is less than the face value (PV FV) 2. price is greater than the face value (PV FV) 3. price is equal to face value (PV = FV) are bond yields guaranteed? - Answers no. market interest rates change constantly, so bond prices do as well. Formula for Current Yield - Answers Current Yield = Coupon Payment / Market Price