Tutorial Activity– 4

Q1. Explain the following accounting concepts

(a) Business Entity Concept

(b) Money Measurement Concept
(c) Going Concern concept
(d) Accounting Period Concept
(e) Cost Concept

Q2. What do you mean by assets? Explain different kind of assets with example

Q3. Calculate the cost of different types of stocks from the information given below

1 Debt: The company can raise an unlimited amount of debt by selling $1,000 par value, coupon
interest rate =8%, Life span=20-year bonds. Average discount of $32 per Bond. The Company
also must pay flotation costs of $30 per bond

2. Preferred stock: The Company can sell 8% preferred stock at its $97 per-share par value. The cost of
issuing and selling the preferred stock is expected to be $5 per share.

3. Common stock: The Company’s common stock is currently selling for $92 per share. The company
expects to pay cash dividends of $7 per share next year. The company’s dividends have been growing at
an annual rate of 6%.The stock must be under-priced by $7 per share, and flotation costs are expected
to amount to $5 per share.

4. Retained earnings: When measuring this cost, the company does not concern itself with the tax
bracket or brokerage fees of owners. Once the current retained earnings are exhausted, the company
will use new common stock as the form of common stock equity financing

Source of Capital Weight

Long term loan 30%
Preferred Stock 20%
Common Stock Equity 50%
Total

Calculate (Tax rate = 28%)

(a) Cost of long term debt( before tax)

(b) Cost of long term debt (after tax)
(c) Cost of preferred stock
(d) Cost of common stock
(e) Cost of retained earnings
Part B

(a) Calculate the single breakeven point with the company’s financial position (with new financing)

(b) Calculate the weighted average cost of capital with new financing below the breakeven point

(C) Calculate the weighted average cost of capital with new financing above the break even point

(Note answers are rounded to the nearest 0.1%)