Question

What is capital structure made of? Select all that apply.

	a) Debt (liability)
	b) Equity (ownership)
	c) None of above True or False? Contributions received by not-for-profits has no restrictions attached to them. True False Assume that a not-for-profit company has $10 million of long-term tax-exempt debt with an interest rate of 4.5%. The organization has $7 million of unrestricted net assets, with an estimated cost of capital of 6%, and $4 million of restricted net assets (in an endowment) with an estimated 7% return on assets (cost of capital). What is its weighted average cost of capital? In order for your answer to be graded correctly, Do not use any symbols (e.g. $) or comma. Use only numeric values. For example, if your answer is $123,456, then in the boxes below you should type 123456. Answer must contain only one decimal point. True or False? The corporation may distribute some of its profits to its stockholders in the form of a dividend. True False True or False? Preferred dividends must be paid before any dividends may be paid on common stock. True False True or False? Corporations cannot retain at least some, and often all, of their profits for future use by the corporation. True False True or False? Not-for-profits can raise equity capital by soliciting and receiving contributions. True False What is the cost of capital? a) The cost of capital is the average of the cost of common stock, preferred stock, debt, and charitable giving. b) The cost of capital is the weighted average of the cost of common stock, preferred stock, debt, and charitable giving. c) The cost of capital is the average of the cost of long-term debt. d) The cost of capital is the weighted average of the cost of long-term debt.

Answer 1

1	The Capital structure is made of:
	a) Debt (liability)
	b) Equity (Ownership)
2	Contributions received by not-for-profits has no restrictions attached to them.
	False
	There are restrictions on different types of donations received by not for profit organisation.
3	Long-Term Debt: (10,000,000) * (0.045) = 450,000
	Net Assets:
	Unrestricted: (7,000,000) * (0.06) = 420,000
	Restricted: (4,000,000) * (0.07) = 280,000
	Total Cost = 1,150,000
	Total Capital = 21,000,000
	Weighted Average Cost of Capital = 1,150,000/21,000,000 = 0.0548 = 5.5					Answer
4	The corporation may distribute some of its profits to its stockholders in the form of a dividend.
	True
	A dividend is a payment made by a corporation to its shareholders, usually as a distribution of profits