5. What is the main advantage of the Modified Internal Rate of Return (MIRR) ove
ID: 2799338 • Letter: 5
Question
5. What is the main advantage of the Modified Internal Rate of Return (MIRR) over the IRR? 6. What are the accept rules for NPV and IRR? 7. Why is it a problem to have more than 1I sign change in our cash flowe? Cost of Capital 1. What are the 2 main methods for determining the Cost of equity? 2. How can one find the before tax cost of debt? 3. Which cst used in the Weighted Average Cost of Capital needs to be multiplied by (1-T)? 4. When calculating WACC, which capital is excluded and why? Stocks What is the preemptive right associated with a stock? What is the role of the stockholders, board of directors, and the management team in corporate governance? What are two models used by financial analysts to estimate the price of a stock? Is there any condition which renders the dividend discount model useless? In what sense is preferred stock "preferred" over common stock? What do common shareholders get in addition to possible dividends? 1. 2. 3. 4. 5. 6.Explanation / Answer
Answer) Cost of Capital
Answer 1) Two main methods cost of capital :
1) CAPM
Cost of equity = Risk free rate + Beta * (Market return - Risk free rate)
2) Stock price = Expected dividend / (Cost of equity - Growth rate)
Cost of equity = (Expected dividend / Stock price ) + Growth rate
Answer 2) Before tax cost of debt is nothing but the YTM or yield to maturity of the bond.
YTM of bond is calculated as
Price of 2 year bond = Coupon1 / (1+YTM)^1 + (Coupon1 + Par value) / (1+YTM)^2
We solve for YTM from the above equation.
Answer 3) Before tax cost of debt is multiplied by 1-T
Answer 4) Accounts payable and accruals, which arise spontaneously when capital budgeting projects are undertaken, are not included as part of investor-supplied capital because they do not come directly from investors.
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