Corporate Finance Strategy | Questions-Answers

CORPORATE FINANCE
STRATEGY

Contents
Question-1................................................................................................................ 3
Answer-A Risk........................................................................................................ 3
Question-2................................................................................................................ 4
B. Calculate the Cost of Equity given the following........................................................4
Question-3................................................................................................................ 6
References................................................................................................................ 8

Question-1
Answer-A Risk
Returns over a 5-year period
Year Company shares Company debt
Government
Debt
2006 0.2654 0.0146 0.0084
2007 0.2785 0.1364 0.0619
2008 0.2242 0.0755 0.0436
2009 0.1726 -0.02465 0.0328
2010 -0.0191 0.1533 0.0298
Variance 0.014638 0.00585 0.000384
Standard deviation 0.120987 0.076486 0.019599
Total return for five
years Company shares Company debt Government
Total return 0.9216 0.35515 0.1765
Years 5 5 5
Average return 0.18432 0.07103 0.0353
b. The rate of return for level of risks associated with investment is different from debt
incurred. As equity investors take more risks when investors purchase company`s stock
opposed to debt. Furthermore, from the point of any company, during insolvency, equity
shareholders are the stakeholders who are payed at last with the remaining amount. Whereas,
creditors has the right to receive, this indicates that cost of equity of the company is more