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Jacket
Business Accounting and Finance
Tony Davies, University of Wales, Lampeter, UK
Brian Pain, University of Luton, UK
Sources of finance and the cost of capital

Self-test Questions



1

Ordinary shares in limited companies
A)have a limited life, with no voting rights but receive dividends
B)have an unlimited life, and voting rights but receive no dividends
C)have an unlimited life, and voting rights and receive dividends
D)have a limited life, and voting rights and receive dividends
2

Loans to limited companies
A)have a fixed term and receive interest which is allowable for corporation tax, but have no voting rights
B)do not have a fixed term but receive interest which is allowable for corporation tax, and have voting rights
C)have a fixed term and receive interest which is not allowable for corporation tax, but have no voting rights
D)do not have a fixed term and receive interest which is allowable for corporation tax, but have no voting rights
3

Questions 3 to 9 refer to the following diagram:

<a onClick="window.open('/olcweb/cgi/pluginpop.cgi?it=gif::ch14a::/sites/dl/free/0077098250/66362/ch14a.gif','popWin', 'width=558,height=607,resizable,scrollbars');" href="#"><img valign="absmiddle" height="16" width="16" border="0" src="/olcweb/styles/shared/linkicons/image.gif">ch14a (50.0K)</a>ch14a

Earnings per share (eps) is

A)42.5p
B)17.5p
C)12.5p
D)50.0p
4

The price/earnings (P/E) ratio is
A)9.6
B)2.4
C)2.8
D)6.9
5

The dividend per share is
A)2.5p
B)17.5p
C)5.0p
D)42.5p
6

Dividend cover is
A)3.5
B)4.5
C)5.5
D)6.5
7

The dividend yield is
A)14.6%
B)35.4%
C)4.2%
D)2.1%
8

The debt/equity ratio is
A)25.0%
B)11.6%
C)8.7%
D)5.0%
9

The gearing ratio is
A)8.0%
B)10.4%
C)4.7%
D)20.0%
10

A company has a financial structure where equity is 70% of its total debt plus equity. Its cost of equity is 10% and gross loan interest is 5%. Corporation tax is paid at 30%. What is the company's weighted average cost of capital (WACC)?
A)8.05%
B)7.45%
C)8.50%
D)7.50%






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