Study Guides
(238,517)

Canada
(115,191)

York University
(9,816)

Administrative Studies
(1,382)

ADMS 1500
(30)

all
(10)

Final

# ADMS1500 Exam Review.docx

Unlock Document

York University

Administrative Studies

ADMS 1500

all

Fall

Description

ADMS1500 Exam Review
Why might you prefer holding shares to holding debt in a company?
-Leverage company with a lot of debt is highly leveraged, which is good for the shareholders. It means
that they have less risk, and higher participation.
-Debt holders are entitled to a fixed amount of interest
-It only works if the company is going to be successful. More debt= more interest, more risk.
-You would prefer to hold shares if you would like a risk
-Debt with low debt to equity ratio = holding debt is more secure
What are the main differences between preferred shares and common shares? Are all preferred shares the
same?
-Common shares have the residual, preferred shareholders have some sort of preference (in voting,
income)
Weighted average cost of capital:
- to debt and equity being combined together, Percentage figure
ABC Company has $10 million debt at 8% and $20 million common share equity. Tax rate is 30%.
Required rate of return of common shareholders is 20%. Calculate the weighted average cost of capital.
Debt=8%
Equity=20%
Tax Rate on Debt=1-30% =70%
Tax Rate on Equity=1
WACC IS ALWAYS A PERCENTAGE FIGURE
Rate % Tax Adjustment Proportion Weighted AVG
/ total Assets Cost of Capital
Debt 8 0.70 0.3 1.87
Equity 20 1 0.7 13.33
Total 15.20
Right Company has $200 000 debt at 12% and $100 000 common share equity. Tax rate is 30%. Required
Rate of return of common shareholders is 18%. Calculate the weighted average cost of capital.
Rate% Tax Adjustment Proportion WACC
/total assets
Debt 12 0.70 0.67 5.60
Equity 18 1 0.33 9.00
Total 11.60
ABC Company has $10 million debt at 10% and $10 million common share equity. Tax rate is 25%.
Required rate of common shareholders is 20%. Calculate the WACC
Rate% Tax Adjustment Proportion WACC
/total assets
Debt 10 0.75 0.50 3.75
Equity 20 1.00 0.50 10.00
Total 13.75 PAYBACK, PRESENT VALUE, ROI, ROIA
PROBLEM#1:
ABC Company has a 5 year investment opportunity with an upfront non-refundable cost of $150 000. The
risk adjusted cost of capital is 12%. Cash flows are $40 00 per year. Using payback, net present value,
and return on average investment would you recommend accepting the investment? Give details of your
calculations.
PAYBACK: (how soon it will be paid back)
Investment of $150 000 , Annual Cash flow = $40 000 per year
150 000/40 000 = 3.8
.: It will be repaid in 3.8 years
RETURN ON AVERAGE INVESTMENT:
Average net income / investment
10 000 / 150 000 = 6.67%
^Double the figure to get return on average investment
.: Return on average investment = 13.33%
Year Cash Flow Amortization Net Income
1 40 000 30 000 10 000
2 “ ” “ ” “ ”
3 “ ” “ ” “ ”
4 “ ” “ ” “ ”
5 “ ” “ ” “ ”
NET PRESENT VALUE:
Amount is the same every year= use annuity table.
Annuity Rate Years Table Value Amount Present Value
0.1200 5.0 3.6048 40 000 144 192
Subtract Present value from investment. 144 192-150 000= -6 000
.:Since there is a negative figure, it is not a viable option.
PROBLEM#2:
Triac Company has a 5 y

More
Less
Related notes for ADMS 1500