Weighted Average Cost of Capital (WACC)

Question 1

What is the Objective of Management?

Answer 1

1. Reduce Return on capital from shareholder or lenders
2. Increase Return on Investments.

Question 2

How many types Of Decisions

Answer 2

1. Financing Decision
2. Investing Decision

Question 3

Is retained Profits taken as equity or not?

Answer 3

Yes Retain Profits are taken as Equity and same return rate of equity is applied on Retain Profits

Question 4

How many types of Debts?

Answer 4

1. Loan
2. Loan from General Public
3. Bank Overdrafts

Question 5

Rate used while Calculation WACC on
1. Initial Capital
2. Retained Profits

Answer 5

Rate of Dividends to be paid to Shareholders

Question 6

Rate used while Calculation WACC on
1. Loan
2. Overdraft
3. Debenture

Answer 6

Rate of Interest to be paid to Lenders

Question 7

What is the Correct List Avenues of Investment?

Answer 7

1. Government Bonds
2. AAA Rated Bonds
3. AA Rated Bonds
4. Investment Grade Bonds
5. Junk Bonds
6. Defaulted Bonds
7. Blue Chip Securities
8. Small Cap Securities

Question 8

Names OF Credit Rating Agencies in Pakistan?

Answer 8

1. PACRA
2. JCRVIS

Question 9

While Calculating WACC which return in used
1. Annual Return
2. Holding Period yield

Answer 9

Annual Return

Question 10

How to Calculate Annual Return when Holding Period Yield is given?

Answer 10

(return/month of returns )* 12

Question 11

Symbol Of Cost of Equity

Answer 11

Ke

Question 12

Symbol Of Cost of Debt

Answer 12

Kd

Question 13

What is Capital Employed

Answer 13

Equity + Long Term Debt

Question 14

What is Working Capital

Answer 14

Current Asset - Current Laibilty
OR
Fixed Asset + Capital Employed

Question 15

Formula Of WACC

Answer 15

(LTD* Kd + Equity * Ke) / LTD + Equity

Question 16

While Calculating WACC which Value of Equity and Debts are taken
1. Historical value
2. Market value

Answer 16

Market Value

Question 17

What is Intrinsic Value?

Answer 17

maximum Value of asset or security to purchase depending upon returns

Question 18

How to calculate Intrinsic value? (if Return is till Infinity)

Answer 18

(Return/ required rate(Ke)) = Intrinsic Value
(Perpetuity Formula is used)

Question 19

How to calculate Intrinsic value? (If returns are received for few Years)

Answer 19

Return* {(1-(1+i)^r) / i}
(Present value of future cashflows of an asset)

Question 20

Profit=

Answer 20

Asset * ROE

Question 21

Is profits are equal to Dividends

Answer 21

Yes

Question 22

on which Value Company always earns returns
1. Book value
2. market value

Answer 22

Book Values of an asset or Shares

Question 23

Market Value of shares
when Company policy is 100% payout of dividends

Answer 23

dividend / Ke

Question 24

What is formula for Ke when Company policy is 100% payout of dividends

Answer 24

Dividend / Market Value of Share

Question 25

Growth rate Through Historic Dividend Method

Answer 25

1st Dividend*(1+ g) = Last Dividend (Where g is Growth)

Question 26

Growth Rate Through Gorden's Method

Answer 26

g=b*r (where b= Retaintion Ratio r = Return of Equity

Question 27

Formula Used is Calculation of Present Value of Growing Perpetuity

Answer 27

PV= {Dividend * (1 + g)} / (Ke - g) (Where g is Growth Rate)

Question 28

By default which method is used to calculate Growth rate 1. Historical Dividend method 2. Gordan's Method

Answer 28

1. Historical Dividend method

Question 29

how many types of dividend payout?

Answer 29

There are three Types of Payouts 1. constant 100% Payout 2. Constantly Growing Dividends 3, Super normal Growth model

Question 30

Market Value =

Answer 30

E/P ratio * EPS

Question 30

Dividend Yields Ratio=

Answer 30

dividends/Market value of share

Question 31

Ke=

Answer 31

{Dividend(1+g)}/(Market value) + g

Question 32

when Ke= Dy

Answer 32

when company payout is 100% (profit = dividends)

Question 33

Payout % =

Answer 33

PE Ratio * Dividend Yields

Question 34

Retaintion Ratio =

Answer 34

1- Payout %

Question 35

In Super normal Growth in dividends Market value is calculated as

Answer 35

PV Of Terminal Value + PV of Supernormal growth (remaining Values)

Question 36

Which rate is used for calculation of PV in Super Normal Method?

Answer 36

Ke

Question 37

What is terminal Value?

Answer 37

The value from which the super growth is converted to the normal growth.