FIN 6100 Module 2 Test Questions and Answers Fully Solved Latest Update

FIN 6100 Module 2 Test Questions and Answers Fully Solved Latest Update Cost of Capital Definition - Answers The cost of capital (WACC) is the overall interest rate that companies pay to finance operations and assets, used in project valuation and investment decisions. What Determines WACC? - Answers WACC reflects the risk of the project, not just the funding source. Different divisions and projects within a company may have different WACCs. WACC Formula - Answers WACC = Wd Kd (1-T) + We Ke, where Wd and We are the weights of debt and equity, and Kd and Ke are their respective costs. Cost of Debt Definition - Answers The cost of debt (Kd) is the expected interest rate paid on borrowed funds, based on project risk and repayment terms. Sources of Debt Financing - Answers Debt financing can come from banks, selling bonds, or loans from individuals or other companies. Bond Terminology - Answers Maturity - Total life of bond; Face Value - Amount paid at maturity; Coupon Payment - Periodic interest paid to bondholder. Bond Indenture - Answers A legal contract specifying bond terms, including payment schedules, maturity, and any options such as convertibility or callable features. Yield to Maturity (YTM) - Answers The expected return if a bond is held to maturity, calculated using bond price, coupon payments, and face value. Bond Price vs. Yield Relationship - Answers If market interest rates are higher than the bond's coupon rate, the bond trades at a discount. If lower, it trades at a premium. Current Yield - Answers Measures bond income relative to its market price. Formula: Current Yield = Annual Coupon Payment / Bond Price. Yield to Call (YTC) - Answers The yield earned if a callable bond is redeemed before maturity, reflecting the issuer's right to repurchase the bond early. Types of Bonds - Answers Premium Bond - Trades above face value; Par Bond - Trades at face value; Discount Bond - Trades below face value. Risk Components in Yield - Answers Total return = Risk-free rate + Risk premium, where risk premium accounts for default, liquidity, and interest rate risks. Risk-Free Rate Components - Answers Includes a real rate (reward for delayed consumption) and an inflation premium to preserve purchasing power. Interest Rate Risk - Answers Longer-term bonds and bonds with lower coupon payments experience larger price changes when interest rates fluctuate. Estimating a Firm's Cost of Debt - Answers Preferably determined using bond yields, but can also be estimated using interest expense relative to debt or synthetic credi