Ans 83 is A.
Ans 83 is A.
Q83 Ans C:
Project C has normal cash flows (all cash flows after year 0 are positive), so it cannot have multiple IRRs.
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q84. The cost and availability of capital through debt and equity issue for a company is given below. The target capital structure of the company is 30% debt and 70% equity. Find the marginal cost of capital when the company raised $6 million in capital. The tax rate is 40%.
A. 12.1%
B. 10.2%
C. 10.9%
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Answer Q84 is C
Q 84 Ans C :
When the company raised $6 million, the amount of debt raised was 1.8 million and equity raised was 4.2 million.
Since cost of equity is 12% for any amount raised till $4 million, we see that the cost of equity will now change to 13% (this is the new band)
For debt marginal cost will be 10%.
So the marginal cost of capital will be = 0.7 * 13% + 0.3*10% * (1-0.4) = 10.9%
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q 85 Which of the following is correct?
A. The optimal capital structure is the one that gives the maximum EPS.
B. The optimal capital structure is the one that gives the maximum value to equity holders.
C. The optimal capital structure is the one that gives the maximum WACC.
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Q 85 Ans B :
Optimal capital structure is the one which reduces WACC or in other terms increases firm value.
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q 86 Smita Sherawat, an analyst with Kargil Funds, is estimating a country risk premium to include in his estimate of the cost of equity for a project Kargil Funds is starting in India. Smita has compiled the following information for her analysis:
Indian 20-year government bond yield = 7.20%
20-year U.S. Treasury bond yield = 4.60%
Annualized standard deviation of the Nifty 50 index = 40%.
Annualized standard deviation of Indian dollar denominated 10-year government bond = 24%
Annualized standard deviation of the S&P 500 Index = 18%.
The estimated country risk premium for India based on Smita’s research is closest to:-
A) 2.6%.
B) 4.3%.
C) 5.8%.
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Q 86 Ans C :
Country risk premium = Sovereign Yield Spread * (Annualized std dev of developing country equity index) / (Annualized std dev of sovereign bond market in developed country currency)
Sovereign yield spread = 20 year indian govt bond yield – 20 year US treasury bond yield = 7.2 – 4.6 = 2.6%
CRP = 2.6% * 40% / 24% = 4.3%
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q 87. A company is offered trade credit terms of 3/10, net 60. The implicit cost of not taking discount and paying the account in 60 days is approximately
A. 20.36%
B. 24.90%
C. 19.7%
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Q87 Ans B:
The cost of not taking the discount can be calculated using the formula given, or one can think of the following:
3/10 net 60 implies that 3% discount will be received if paid in 3 days and the payment has to be made by 60^{th} day, this means that there will be no discount given if the payment is made after 10^{th} day. For a firm it is best to pay on 60^{th} day if it has missed the deadline of 10^{th} day.
Let's say we have to make a payment of $100, if paid within 10 days we will pay $97, so the benefit we are losing when paid after 10^{th} day is $3 on $97. Now we will annualize this rate.
So the annualized rate will be [(1+ 3/97)^{(365/50)} ]– 1 = 0.249 or 24.9%
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q88. Julie Wong, CFA is reviewing corporate governance practice of firms and makes the following statements:
Statement 1: Companies should adopt code of ethics and abide by that in all their dealings with shareholders and other parties
Statement 2: A staggered board may serve as an anti-take over device
Julie is correct with respect to:
A. Statement 1 but not statement 2
B. Statement 1 and statement 2
C. Statement 2 but not statement 1
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Ans 88 A
Q88 Ans B:
First statement is correct. With regards to the second statement, a staggered board acts as a anti takeover mechanism. When a hostile bidder tries to acquire a company with a staggered board, it is forced to wait at least one year for the next annual meeting of shareholders before it can gain control. Furthermore, hostile bidders are forced to win two seats on the board; the elections for these seats occur at different points in time (at least one year apart), creating yet another obstacle for the hostile bidder.
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Today's Question (Questions and answers provided by Knowledge Varsity)
Q 89. A firm has issued 3 floating rate bonds, all of them have same reference rate (LIBOR) and same spread over the reference rate. Which of these is most likely to suffer from high interest rate risk?
A. Bond X which will reset the rate at 90 days interval
B. Bond Y which will reset the rate at 180 days interval
C. Bond Z which will reset the rate at 60 days interval
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Ans 89 seems A.
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