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ADMS1500 Exam Review.docx

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Administrative Studies
ADMS 1500
Paul Evans

ADMS1500 Exam ReviewWhy might you prefer holding shares to holding debt in a companyLeverage 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 riskDebt with low debt to equity ratioholding debt is more secureWhat are the main differences between preferred shares and common shares Are all preferred shares the sameCommon shares have the residual preferred shareholders have some sort of preference in voting incomeWeighted average cost of capitalto debt and equity being combined together Percentage figureABC 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 Debt8Equity20Tax Rate on Debt130 70Tax Rate on Equity1WACC IS ALWAYS A PERCENTAGE FIGURERate Tax AdjustmentProportion Weighted AVG Cost of Capital total AssetsDebt807003187Equity201071333Total1520Right 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 RateTax AdjustmentProportionWACCtotal assetsDebt12070067560Equity181033900Total1160
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