A bank that seeks to increase its risk-adjusted capital ratio has a number of options at its disposal including: Issue new equity, such as through a rights issue to existing shareholders, an equity offering on the open market, or by placing a bloc of shares with an outside investor. Increase retained earnings by reducing the share of its profit it pays out in dividends. Reduce its risk-weighted assets by replacing riskier loans with safer ones or with government securities. Chose 1 option from below: Only I is correct. Only II is correct. I and II are correct. Only III is correct. I, II and III are correct.
Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
A bank that seeks to increase its risk-adjusted capital ratio has a number of options at its disposal including:
- Issue new equity, such as through a rights issue to existing shareholders, an equity offering on the open market, or by placing a bloc of shares with an outside investor.
- Increase
retained earnings by reducing the share of its profit it pays out in dividends. - Reduce its risk-weighted assets by replacing riskier loans with safer ones or with government securities.
Only I is correct.
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