0.25/ 0.25pts
Question 1
0.25/ 0.25pts
Charmer Retail Group pays its preference shareholders dividends every six months at a rate of 9% p.a. against a $1000 par value.
What is the maximum amount you are willing to pay to purchase these shares if your required rate of return is 9.3% p.a.?
(Express your answers in dollars, to two decimal places.Omit the $ sign.)
Correct!
Correct answer
967.74margin of error+/-0.1%
Work out the semi-annual dividend in dollars:Div = Payment rate divided by 2 and expressedin decimal x $1000 par value.
Your required rate of return,r%must be divided by 2andapplied in the formula below as a decimal.
The maximum value of these shares to you based on your required rate of return,
Question 2
0/ 0.5pts
InkstoneLtd. is planning to distribute an upcoming half-yearly dividend of $0.75 per share to ordinary shareholders.The company expects dividends to continue grow at a rate of 5.3%p.a.indefinitely.
The company's shareholders expect a 9.0% p.a. rate of return on their investment, what is the market price of the firm's shares?
(Express your answer in dollars to two decimal places. Omit the $ sign.)
You Answered
Correct answer
40.54margin of error+/-0.1
Dividends here are paid twice a year.
Ensure you use the semi-annual growth rate,g,and the semi-annual discount rate,r.
Market value of these ordinary shares,are determined based on the market required rate of return of shareholders.
Dividends are expected to grow at a constant rate,indefinitely.So you can use the Constant Growth Model:
where the upcoming dividend is D1.
UnansweredQuestion 3
0/ 1pts
This is a file upload question. First read these instructions carefully
To earn marks for this question,you must upload a photo of yourhandwrittenworkings.
On a clean sheet of paper, write down your workings(in formula form and the timeline) and your final answer.
Listing your Calculator Steps are not full workings, and may only be used to support your timeline and written equations.
Place your photo ID (ECU Student ID card, drivers licenceor passport) alongside your handwritten workings.
Take one photo of your full workings,saveit on your computer,and uploadyour file.
Ensure your file is in JPEG, not HEIC format.Turn off the 'Live' function on your phone's camera.
Upload the photo of your workingsUpload Imagefunction from the toolbar above. Or, you can chooseInsert > Image > Upload Image.
Your answer will be marked manually by teaching staff, so your results for the test will not be immediately finalisedwhen you submit this test. Final scores are available a few days later.
Do not email your lecturer the photo file after the test has completed. Your workings must be marked within the test portal.
The question is as follows:
Chesterfield Industries recently paid ordinary shareholders a dividend of $3.60 per share.
For the next five years, dividends are expected to grow at a rate of 4% p.a.
After that, dividends will grow at a rate of 2.5% p.a., indefinitely.
What is the value of these shares to you, if your required rate of return is 9.5% p.a.?
(Express your answer in dollars to two decimal places. Ensure you use four or five decimal places in your workings to reduce rounding errors).
Your answer:
Workings are marked based on completeness. Elements to be displayed must include dividends set out on the timeline, a valuation at a future date based on adapting the constant growth equation, and the total PV of dividends plus the future valuation arising from the constant growth rate.
Ensure you place your photo ID alongside thehandwrittenworkings when taking the picture. Otherwise, you will receive a mark of zero.
Question 4
0.5/ 0.5pts
Selecttwo correct statementswhich relate to the advantages and disadvantages of debt and equity funding for a firm.
Correct!
One advantage of debt funding is that interest expenses are tax deductible so the company can employ debt as a source of funds to help reduce corporate taxes paid.
One advantage of equity is that is much cheaper to raise than debt finance,since transaction and issue costs are lower, and the company can raise large sums of funds through equity quicker than securing a loan.
A disadvantage of equity is that the company must distribute dividends to shareholders regardless of whether it has been a profitable year or not.
Correct!
One disadvantage of issuing new equity is the dilution of ownership claims for existing shareholders.
The cost of equity is lower than the cost of debt, so a firm will prefer to raise capital from shareholders than from lenders because the cost of capital is 'cheaper'.
Correct -One advantage of debt funding is that interest expenses are tax deductible so the company can employ debt as a source of funds to help reduce corporate taxes paid.
Incorrect -One advantage ofequitydebtis that is much cheaper to raise thandebtequityfinance,since transaction and issue costs are lower,and the company canraise large sums of funds throughequity quicker than securing a loansecure a loan from a single lender quicker than a large group of individual shareholders.
Incorrect -A disadvantageAn advantageof equity is that the companymustcan choose not todistribute dividends to shareholdersregardless of whether it has been a profitable year or notif the year has not been profitable.
Correct -One disadvantage of issuing new equity is the dilution of ownership claims for existing shareholders.
Incorrect -The cost ofequitydebtis lower than the cost ofdebtequity,so a firm will prefer to raise capital fromshareholderslendersthan fromlendersshareholdersbecause the cost of capital is 'cheaper'.
UnansweredQuestion 5
0/ 0.5pts
What is the market price of a $1 million, 25 year government bond that pays a semi-annual coupon at a rate of 4.7% p.a. if themarket yield is currently 8.6% p.a.?
(Express your answer in dollars to two decimal places. Omit the $ sign)
You Answered
Correct answer
601,763.98margin of error+/-1%
This bond pays coupons semi-annually.Be sure to use:
PMT = the dollar value of semi-annual coupon payments,coupon rate divided by 2x $1mil face value.
N = the number of semi-annual periods over the bond's life,years x 2
FV = the $1million face value at the end of the bond's life
and,r =the semi-annual market yield,annual yield divide by 2.
The value or market price of the bond is determined with the formula:
Question 6
0/ 0.25pts
Since a bond is a debt contract, changes to the creditworthiness of a the borrower will impact the market yield of the bond trading on the market.
Select the correct statementfor the following:
When a company's credit standing has improved after a bond's issue, its...
You Answered
market yields will rise,leading to anincrease in the bond's price.
market yields will rise,leading to a decreasein the bond's price.
market yields will fall,leading to a decreasein the bond's price.
Correct answer
market yields will fall,leading to an increasein the bond's price.
UnansweredQuestion 7
0/ 0.5pts
LegardeTransportation's corporate bonds have a face value of $100,000 and will mature in 15 years.
These bonds currently trade on the market at a price of $68,705.61 and pay coupons quarterly at a rate of 4.68% p.a.
Part (a): What is the nominal annual yield?
(Express your answer in percentage, to four decimal places. Omit the % sign.)
Part (b): What is the effective annual yield?
(Express your answer in percentage, to four decimal places. Omit the % sign.)
Your answers:The nominal annual yield is% p.a. and the effective annual yield is% p.a.
Answer 1:
You Answered(You left this blank)
Correct answer
8.3600
Answer 2:
You Answered(You left this blank)
Correct answer
8.6258
Coupons are paid quarterly.The quarterly coupon payment =4.68%4$100,000= $1,170
First, solve for the nominal yield per quarter:$68,705.61=$1,170[1(1+RB)60RB]+$100,000(1+RB)60
RB, nominal quarterly yield = 2.09%
Second, convert the nominal quarterly yield to a nominal annual yield= 2.09% x 4 times p.a. = 8.3600% p.a.
Third, solve for the effective annual yield.EAR=(1+0.08364)41=0.086258=8.6258%p.a.
UnansweredQuestion 8
0/ 1.5pts
You have the opportunity to invest in a preference share, a corporate bond, and an ordinary share. Your required rate of return is 9% p.a.
The preference sharepays constant annual dividends of $5.20 per share. These preference shares are currently trading at a market price of $61.90 per share.
The corporate bondhas a face value of $10,000 and pays semi-annual coupons at a rate of 6.5% p.a. There are 15 years remaining in the life of the bond. The current market price for these bonds is $7,188.23.
The ordinary sharerecently paid a half-yearly dividend of $1.42 per share and the company expects dividends to continue growing at a rate of 5% p.a. indefinitely. These ordinary shares are currently trading at a market price of $41.58 per share.
Answer the following questions:
What is the value of the preference share to you? Will youinvest in(or not invest in) the preference share? Why?
What is the value of the corporate bond to you? Will youinvest in(or not invest in) the corporate bond? Why?
What is the value of the ordinary share to you? Will youinvest in(or not invest in) the ordinary share? Why?
(min 150 words, maximum 200 words)
Your answer:
Given my RoR = 9% p.a., the preference share is worth $57.77 to me. I will not invest in the preference share because it is currently trading at a market price of $61.90 which is higher than the maximum amount I am willing to pay (invest in), and consider these preference shares overvalued.
The corporate bond is worth $7,963.88 to me, given my RoR is 9% p.a. I will invest in the corporate bond because it is currently trading at a market price of $7,188.23 which is lower than the maximum amount I am willing to pay (invest in), and consider these corporate bonds undervalued.
The ordinary share is worth $72.77 to me, given my RoR is 9% p.a. I will invest in the ordinary shares because it is currently trading at a market price of $41.58 which is lower than the maximum amount I am willing to pay (invest in), and consider these ordinary shares undervalued
UnansweredQuestion 9
0/ 1.5pts
The following table outlines the sources of funding for Ghent Silicon Co. However, the calculations for the companys Weighted Average Cost of Capital (WACC) is incomplete.
Complete the calculations in the following order, to determine the companys WACC:
(a) Determine the market weight for the bank loan funding. Express your answer to four decimal places.
Answer:Weight for the bank loan =
(b) Determine the after-tax cost of debt for the bond and for the bank loan. Express your answers in percentage (omit the % sign), to two decimal places.
Answers:After-tax cost of bond =% and After-tax cost of the bank loan =%
(c) Determine the weighted costs for the bond and the bank loan. Express your answers in percentage (omit the % sign), to four decimal places.
Answers:Weighted cost of bond =% and weighted cost of the bank loan =%
(d) Calculate the WACC. Express your answer in percentage (omit the % sign), to four decimal places.
Answer:The WACC =%
Answer 1:
You Answered(You left this blank)
Correct answer
0.1649
Answer 2:
You Answered(You left this blank)
Correct answer
5.71
Answer 3:
You Answered(You left this blank)
Correct answer
4.93
Answer 4:
You Answered(You left this blank)
Correct answer
1.4115
Answer 5:
You Answered(You left this blank)
Correct answer
0.8129
Answer 6:
You Answered(You left this blank)
Correct answer
8.1901
Market Value Weight Cost of capital, before tax Cost of capital, after tax Weighted Costs
Bond $ 12,000,000 0.2474 8.15% 5.71% 1.4115%
Bank Loan $ 8,000,000 0.1649 7.04% 4.93% 0.8129%
Preference Shares $ 9,000,000 0.1856 9.68% 1.7963%
Ordinary Shares $ 19,500,000 0.4021 10.37% 4.1694%
$ 48,500,000 1.0000 WACC = 8.1901%
UnansweredQuestion 10
0/ 1.5pts
This question relates to the WACC calculated in Question 9. It evaluates your understanding of the concepts behind a firms WACC.
In order for the company to evaluate future investment opportunities using the WACC you calculated in Question 9, the assumptions of constant business risk and constant financial risk must hold.
Explainwhat is meant by constant business risk and constant financial risk.Elaborate your discussionsand state what will happen to the respective costs of capital and the overall WACC if business risk and financial risk changes.
(min 100 words, max 200 words)
Your answer:
The following are examples of structuring elaborate discussions and contextualised to how each example may impact the individual costs of capital and the overall WACC.
Constant business risk -The companys operations impacting earnings/ sales/ revenues and operating expenses should remain the same in order for the assumption of constant business risks to hold. If the company ventures into a new business line or operations, then this changes the riskiness of overall operations. A new venture where the firm has no experience in operating under entails more business risks, so the individual costs of capital (debt and equity) will rise, as lenders perceive the firm to be a riskier borrower, and shareholders/ investors perceive more uncertainty in dividend/ earnings distribution and the firms investment potential. If this were to happen, then the overall WACC will also increase.
Constant business risk Changes to the broader macroeconomy will also impact market conditions and the levels of company earnings/ sales/ revenues or operating expenses. If the economy experiences stronger than expected growth, then business risks for a firm may reduce and riskiness of overall operations will fall. As a result, a companys creditworthiness to lenders may improve so lenders may reduce interest rates on borrowing and this will cause costs of debt to decrease. Shareholders/ investors may also perceive less uncertainty in distributions of firm earnings through dividends and there may be a positive sentiment of the firms investment potential. From these, the overall WACC may fall.
Constant financial risk Changes to a companys capital or funding mix will alter the levels of financial risk for the companys lenders and shareholders. For example, increases in the companys indebtedness through new borrowing/ debt increases financial risk to existing lenders as firms may face a reduced capacity to repay and therefore creditworthiness may decline. Higher levels of debt also create more uncertainty for residual earnings to be distributed to shareholders as dividends and limit the companys ability to invest in value enhancing projects. So higher debt levels will mean the costs of debt and the costs of equity capital will rise, and so will the overall WACC.
UnansweredQuestion 11
0/ 0pts
Before you Submit,ensure you can confirm you completed this assessment with Academic Integrity.
Read each statement and select all statements as part of your Student Declaration.
If you are unsure about any of the following statements,DO NOT SUBMITyour assessment before speaking with your Unit Coordinator,Lecturer,or ECU Learning Adviser.
If you have ticked to confirm all the statements,you can be confident that you have complete this assessment with Academic Integrity.
If you cannot confirm any or all of the statements,your Unit Coordinator will investigate the authenticity of your work. You may be required to attend an interview as part of the investigation.Plagiarism, collusion and contract cheating are forms of Academic Misconduct.
Possible penalties and implications arising from Academic Misconduct depends on whether the act was deliberate or unintentional. It will be dealt with in one of the following ways, in accordance with ECU Policy:
zero mark for the task;
zero mark for the assessment;
zero mark for the unit;
expulsion from the course;
expulsion from the university.
Even past students (completed the unit, or completed the course) who participate in Academic Misconduct can be implicated and be subject to the penalties listed above.
Question 1
0.25/ 0.25pts
Charmer Retail Group pays its preference shareholders dividends every six months at a rate of 9% p.a. against a $1000 par value.
What is the maximum amount you are willing to pay to purchase these shares if your required rate of return is 9.3% p.a.?
(Express your answers in dollars, to two decimal places.Omit the $ sign.)
Correct!
Correct answer
967.74margin of error+/-0.1%
Work out the semi-annual dividend in dollars:Div = Payment rate divided by 2 and expressedin decimal x $1000 par value.
Your required rate of return,r%must be divided by 2andapplied in the formula below as a decimal.
The maximum value of these shares to you based on your required rate of return,
Question 2
0/ 0.5pts
InkstoneLtd. is planning to distribute an upcoming half-yearly dividend of $0.75 per share to ordinary shareholders.The company expects dividends to continue grow at a rate of 5.3%p.a.indefinitely.
The company's shareholders expect a 9.0% p.a. rate of return on their investment, what is the market price of the firm's shares?
(Express your answer in dollars to two decimal places. Omit the $ sign.)
You Answered
Correct answer
40.54margin of error+/-0.1
Dividends here are paid twice a year.
Ensure you use the semi-annual growth rate,g,and the semi-annual discount rate,r.
Market value of these ordinary shares,are determined based on the market required rate of return of shareholders.
Dividends are expected to grow at a constant rate,indefinitely.So you can use the Constant Growth Model:
where the upcoming dividend is D1.
UnansweredQuestion 3
0/ 1pts
This is a file upload question. First read these instructions carefully
To earn marks for this question,you must upload a photo of yourhandwrittenworkings.
On a clean sheet of paper, write down your workings(in formula form and the timeline) and your final answer.
Listing your Calculator Steps are not full workings, and may only be used to support your timeline and written equations.
Place your photo ID (ECU Student ID card, drivers licenceor passport) alongside your handwritten workings.
Take one photo of your full workings,saveit on your computer,and uploadyour file.
Ensure your file is in JPEG, not HEIC format.Turn off the 'Live' function on your phone's camera.
Upload the photo of your workingsUpload Imagefunction from the toolbar above. Or, you can chooseInsert > Image > Upload Image.
Your answer will be marked manually by teaching staff, so your results for the test will not be immediately finalisedwhen you submit this test. Final scores are available a few days later.
Do not email your lecturer the photo file after the test has completed. Your workings must be marked within the test portal.
The question is as follows:
Chesterfield Industries recently paid ordinary shareholders a dividend of $3.60 per share.
For the next five years, dividends are expected to grow at a rate of 4% p.a.
After that, dividends will grow at a rate of 2.5% p.a., indefinitely.
What is the value of these shares to you, if your required rate of return is 9.5% p.a.?
(Express your answer in dollars to two decimal places. Ensure you use four or five decimal places in your workings to reduce rounding errors).
Your answer:
Workings are marked based on completeness. Elements to be displayed must include dividends set out on the timeline, a valuation at a future date based on adapting the constant growth equation, and the total PV of dividends plus the future valuation arising from the constant growth rate.
Ensure you place your photo ID alongside thehandwrittenworkings when taking the picture. Otherwise, you will receive a mark of zero.
Question 4
0.5/ 0.5pts
Selecttwo correct statementswhich relate to the advantages and disadvantages of debt and equity funding for a firm.
Correct!
One advantage of debt funding is that interest expenses are tax deductible so the company can employ debt as a source of funds to help reduce corporate taxes paid.
One advantage of equity is that is much cheaper to raise than debt finance,since transaction and issue costs are lower, and the company can raise large sums of funds through equity quicker than securing a loan.
A disadvantage of equity is that the company must distribute dividends to shareholders regardless of whether it has been a profitable year or not.
Correct!
One disadvantage of issuing new equity is the dilution of ownership claims for existing shareholders.
The cost of equity is lower than the cost of debt, so a firm will prefer to raise capital from shareholders than from lenders because the cost of capital is 'cheaper'.
Correct -One advantage of debt funding is that interest expenses are tax deductible so the company can employ debt as a source of funds to help reduce corporate taxes paid.
Incorrect -One advantage ofequitydebtis that is much cheaper to raise thandebtequityfinance,since transaction and issue costs are lower,and the company canraise large sums of funds throughequity quicker than securing a loansecure a loan from a single lender quicker than a large group of individual shareholders.
Incorrect -A disadvantageAn advantageof equity is that the companymustcan choose not todistribute dividends to shareholdersregardless of whether it has been a profitable year or notif the year has not been profitable.
Correct -One disadvantage of issuing new equity is the dilution of ownership claims for existing shareholders.
Incorrect -The cost ofequitydebtis lower than the cost ofdebtequity,so a firm will prefer to raise capital fromshareholderslendersthan fromlendersshareholdersbecause the cost of capital is 'cheaper'.
UnansweredQuestion 5
0/ 0.5pts
What is the market price of a $1 million, 25 year government bond that pays a semi-annual coupon at a rate of 4.7% p.a. if themarket yield is currently 8.6% p.a.?
(Express your answer in dollars to two decimal places. Omit the $ sign)
You Answered
Correct answer
601,763.98margin of error+/-1%
This bond pays coupons semi-annually.Be sure to use:
PMT = the dollar value of semi-annual coupon payments,coupon rate divided by 2x $1mil face value.
N = the number of semi-annual periods over the bond's life,years x 2
FV = the $1million face value at the end of the bond's life
and,r =the semi-annual market yield,annual yield divide by 2.
The value or market price of the bond is determined with the formula:
Question 6
0/ 0.25pts
Since a bond is a debt contract, changes to the creditworthiness of a the borrower will impact the market yield of the bond trading on the market.
Select the correct statementfor the following:
When a company's credit standing has improved after a bond's issue, its...
You Answered
market yields will rise,leading to anincrease in the bond's price.
market yields will rise,leading to a decreasein the bond's price.
market yields will fall,leading to a decreasein the bond's price.
Correct answer
market yields will fall,leading to an increasein the bond's price.
UnansweredQuestion 7
0/ 0.5pts
LegardeTransportation's corporate bonds have a face value of $100,000 and will mature in 15 years.
These bonds currently trade on the market at a price of $68,705.61 and pay coupons quarterly at a rate of 4.68% p.a.
Part (a): What is the nominal annual yield?
(Express your answer in percentage, to four decimal places. Omit the % sign.)
Part (b): What is the effective annual yield?
(Express your answer in percentage, to four decimal places. Omit the % sign.)
Your answers:The nominal annual yield is% p.a. and the effective annual yield is% p.a.
Answer 1:
You Answered(You left this blank)
Correct answer
8.3600
Answer 2:
You Answered(You left this blank)
Correct answer
8.6258
Coupons are paid quarterly.The quarterly coupon payment =4.68%4$100,000= $1,170
First, solve for the nominal yield per quarter:$68,705.61=$1,170[1(1+RB)60RB]+$100,000(1+RB)60
RB, nominal quarterly yield = 2.09%
Second, convert the nominal quarterly yield to a nominal annual yield= 2.09% x 4 times p.a. = 8.3600% p.a.
Third, solve for the effective annual yield.EAR=(1+0.08364)41=0.086258=8.6258%p.a.
UnansweredQuestion 8
0/ 1.5pts
You have the opportunity to invest in a preference share, a corporate bond, and an ordinary share. Your required rate of return is 9% p.a.
The preference sharepays constant annual dividends of $5.20 per share. These preference shares are currently trading at a market price of $61.90 per share.
The corporate bondhas a face value of $10,000 and pays semi-annual coupons at a rate of 6.5% p.a. There are 15 years remaining in the life of the bond. The current market price for these bonds is $7,188.23.
The ordinary sharerecently paid a half-yearly dividend of $1.42 per share and the company expects dividends to continue growing at a rate of 5% p.a. indefinitely. These ordinary shares are currently trading at a market price of $41.58 per share.
Answer the following questions:
What is the value of the preference share to you? Will youinvest in(or not invest in) the preference share? Why?
What is the value of the corporate bond to you? Will youinvest in(or not invest in) the corporate bond? Why?
What is the value of the ordinary share to you? Will youinvest in(or not invest in) the ordinary share? Why?
(min 150 words, maximum 200 words)
Your answer:
Given my RoR = 9% p.a., the preference share is worth $57.77 to me. I will not invest in the preference share because it is currently trading at a market price of $61.90 which is higher than the maximum amount I am willing to pay (invest in), and consider these preference shares overvalued.
The corporate bond is worth $7,963.88 to me, given my RoR is 9% p.a. I will invest in the corporate bond because it is currently trading at a market price of $7,188.23 which is lower than the maximum amount I am willing to pay (invest in), and consider these corporate bonds undervalued.
The ordinary share is worth $72.77 to me, given my RoR is 9% p.a. I will invest in the ordinary shares because it is currently trading at a market price of $41.58 which is lower than the maximum amount I am willing to pay (invest in), and consider these ordinary shares undervalued
UnansweredQuestion 9
0/ 1.5pts
The following table outlines the sources of funding for Ghent Silicon Co. However, the calculations for the companys Weighted Average Cost of Capital (WACC) is incomplete.
Complete the calculations in the following order, to determine the companys WACC:
(a) Determine the market weight for the bank loan funding. Express your answer to four decimal places.
Answer:Weight for the bank loan =
(b) Determine the after-tax cost of debt for the bond and for the bank loan. Express your answers in percentage (omit the % sign), to two decimal places.
Answers:After-tax cost of bond =% and After-tax cost of the bank loan =%
(c) Determine the weighted costs for the bond and the bank loan. Express your answers in percentage (omit the % sign), to four decimal places.
Answers:Weighted cost of bond =% and weighted cost of the bank loan =%
(d) Calculate the WACC. Express your answer in percentage (omit the % sign), to four decimal places.
Answer:The WACC =%
Answer 1:
You Answered(You left this blank)
Correct answer
0.1649
Answer 2:
You Answered(You left this blank)
Correct answer
5.71
Answer 3:
You Answered(You left this blank)
Correct answer
4.93
Answer 4:
You Answered(You left this blank)
Correct answer
1.4115
Answer 5:
You Answered(You left this blank)
Correct answer
0.8129
Answer 6:
You Answered(You left this blank)
Correct answer
8.1901
Market Value Weight Cost of capital, before tax Cost of capital, after tax Weighted Costs
Bond $ 12,000,000 0.2474 8.15% 5.71% 1.4115%
Bank Loan $ 8,000,000 0.1649 7.04% 4.93% 0.8129%
Preference Shares $ 9,000,000 0.1856 9.68% 1.7963%
Ordinary Shares $ 19,500,000 0.4021 10.37% 4.1694%
$ 48,500,000 1.0000 WACC = 8.1901%
UnansweredQuestion 10
0/ 1.5pts
This question relates to the WACC calculated in Question 9. It evaluates your understanding of the concepts behind a firms WACC.
In order for the company to evaluate future investment opportunities using the WACC you calculated in Question 9, the assumptions of constant business risk and constant financial risk must hold.
Explainwhat is meant by constant business risk and constant financial risk.Elaborate your discussionsand state what will happen to the respective costs of capital and the overall WACC if business risk and financial risk changes.
(min 100 words, max 200 words)
Your answer:
The following are examples of structuring elaborate discussions and contextualised to how each example may impact the individual costs of capital and the overall WACC.
Constant business risk -The companys operations impacting earnings/ sales/ revenues and operating expenses should remain the same in order for the assumption of constant business risks to hold. If the company ventures into a new business line or operations, then this changes the riskiness of overall operations. A new venture where the firm has no experience in operating under entails more business risks, so the individual costs of capital (debt and equity) will rise, as lenders perceive the firm to be a riskier borrower, and shareholders/ investors perceive more uncertainty in dividend/ earnings distribution and the firms investment potential. If this were to happen, then the overall WACC will also increase.
Constant business risk Changes to the broader macroeconomy will also impact market conditions and the levels of company earnings/ sales/ revenues or operating expenses. If the economy experiences stronger than expected growth, then business risks for a firm may reduce and riskiness of overall operations will fall. As a result, a companys creditworthiness to lenders may improve so lenders may reduce interest rates on borrowing and this will cause costs of debt to decrease. Shareholders/ investors may also perceive less uncertainty in distributions of firm earnings through dividends and there may be a positive sentiment of the firms investment potential. From these, the overall WACC may fall.
Constant financial risk Changes to a companys capital or funding mix will alter the levels of financial risk for the companys lenders and shareholders. For example, increases in the companys indebtedness through new borrowing/ debt increases financial risk to existing lenders as firms may face a reduced capacity to repay and therefore creditworthiness may decline. Higher levels of debt also create more uncertainty for residual earnings to be distributed to shareholders as dividends and limit the companys ability to invest in value enhancing projects. So higher debt levels will mean the costs of debt and the costs of equity capital will rise, and so will the overall WACC.
UnansweredQuestion 11
0/ 0pts
Before you Submit,ensure you can confirm you completed this assessment with Academic Integrity.
Read each statement and select all statements as part of your Student Declaration.
If you are unsure about any of the following statements,DO NOT SUBMITyour assessment before speaking with your Unit Coordinator,Lecturer,or ECU Learning Adviser.
If you have ticked to confirm all the statements,you can be confident that you have complete this assessment with Academic Integrity.
If you cannot confirm any or all of the statements,your Unit Coordinator will investigate the authenticity of your work. You may be required to attend an interview as part of the investigation.Plagiarism, collusion and contract cheating are forms of Academic Misconduct.
Possible penalties and implications arising from Academic Misconduct depends on whether the act was deliberate or unintentional. It will be dealt with in one of the following ways, in accordance with ECU Policy:
zero mark for the task;
zero mark for the assessment;
zero mark for the unit;
expulsion from the course;
expulsion from the university.
Even past students (completed the unit, or completed the course) who participate in Academic Misconduct can be implicated and be subject to the penalties listed above.
