Cost Of Capital

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Introduction to Corporate Finance
Financial Statements,Taxes,and Cash Flow
Working With Financial Statements
Long-Term Financial Planning and Growth
Introduction to Valuation: The Time Value of Money
Discounted Cash Flow Valuation
Interest Rates and Bond Valuation
Stock Valuation
Net Present Value and Other Investment Criteria
Making Capital Investment Decisions
Project Analysis and Evaluation
Some Lessons From Capital Market History
Return,Risk,and the Security Market Line
Cost of Capital
Raising Capital
Financial Leverage and Capital Structure Policy
Dividends and Payout Policy
Short-Term Finance and Planning
Cash and Liquidity Management
Credit and Inventory Management
International Corporate Finance
Behavioral Finance: Implications for Financial Management
Enterprise Risk Management
Options and Corporate Finance
Option Valuation
Mergers and Acquisitions
Leasing

All Questions

Question 1

Free

Multiple Choice

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith,Inc.What is the return that these individuals require on this investment called?

Choose correct answer/s

dividend yield

cost of equity

capital gains yield

cost of capital

income return

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Question 2

Free

Multiple Choice

Textile Mills borrows money at a rate of 13.5 percent.This interest rate is referred to as the:

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compound rate.

current yield.

cost of debt.

capital gains yield.

cost of capital.

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Question 3

Free

Multiple Choice

The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:

Choose correct answer/s

reward to risk ratio.

weighted capital gains rate.

structured cost of capital.

subjective cost of capital.

weighted average cost of capital.

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Question 4

Free

Multiple Choice

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project,the manager is utilizing the _____ approach.

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subjective risk

pure play

divisional cost of capital

capital adjustment

security market line

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Question 5

Free

Multiple Choice

A firm's cost of capital:

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will decrease as the risk level of the firm increases.

for a specific project is primarily dependent upon the source of the funds used for the project.

is independent of the firm's capital structure.

should be applied as the discount rate for any project considered by the firm.

depends upon how the funds raised are going to be spent.

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Question 6

Multiple Choice

The weighted average cost of capital for a wholesaler:

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is equivalent to the aftertax cost of the firm's liabilities.

should be used as the required return when analyzing a potential acquisition of a retail outlet.

is the return investors require on the total assets of the firm.

remains constant when the debt-equity ratio changes.

is unaffected by changes in corporate tax rates.

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Question 7

Multiple Choice

Which one of the following is the primary determinant of a firm's cost of capital?

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debt-equity ratio

applicable tax rate

cost of equity

cost of debt

use of the funds

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Question 8

Multiple Choice

Scholastic Toys is considering developing and distributing a new board game for children.The project is similar in risk to the firm's current operations.The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm's rapid growth.How should the firm determine its cost of equity?

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by adding the market risk premium to the aftertax cost of debt

by multiplying the market risk premium by (1 - 0.40)

by using the dividend growth model

by using the capital asset pricing model

by averaging the costs based on the dividend growth model and the capital asset pricing model

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Question 9

Multiple Choice

All else constant,which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.

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a reduction in the dividend amount

an increase in the dividend amount

a reduction in the market rate of return

a reduction in the firm's beta

a reduction in the risk-free rate

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Question 10

Multiple Choice

A firm's overall cost of equity is:

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is generally less that the firm's WACC given a leveraged firm.

unaffected by changes in the market risk premium.

highly dependent upon the growth rate and risk level of the firm.

generally less than the firm's aftertax cost of debt.

inversely related to changes in the firm's tax rate.

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Question 11

Multiple Choice

The cost of equity for a firm:

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tends to remain static for firms with increasing levels of risk.

increases as the unsystematic risk of the firm increases.

ignores the firm's risks when that cost is based on the dividend growth model.

equals the risk-free rate plus the market risk premium.

equals the firm's pretax weighted average cost of capital.

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Question 12

Multiple Choice

The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?
I)firms that have a 100 percent retention ratio
II)firms that pay a constant dividend
III)firms that pay an increasing dividend
IV)firms that pay a decreasing dividend

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I and II only

I and III only

II and III only

I, II, and III only

II, III, and IV only

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Question 13

Multiple Choice

The dividend growth model:

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is only as reliable as the estimated rate of growth.

can only be used if historical dividend information is available.

considers the risk that future dividends may vary from their estimated values.

applies only when a firm is currently paying dividends.

uses beta to measure the systematic risk of a firm.

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Question 14

Multiple Choice

Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure.

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This model considers a firm's rate of growth.

The model applies only to non-dividend paying firms.

The model is dependent upon a reliable estimate of the market risk premium.

The model generally produces the same cost of equity as the dividend growth model.

This approach generally produces a cost of equity that equals the firm's overall cost of capital.

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Question 15

Multiple Choice

Which of the following statements are correct?
I)The SML approach is dependent upon a reliable measure of a firm's unsystematic risk.
II)The SML approach can be applied to firms that retain all of their earnings.
III)The SML approach assumes a firm's future risks are similar to its past risks.
IV)The SML approach assumes the reward-to-risk ratio is constant.

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I and III only

II and IV only

III and IV only

I, II, and III only

II, III, and IV only

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Question 16

Multiple Choice

The pre-tax cost of debt:

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is based on the current yield to maturity of the firm's outstanding bonds.

is equal to the coupon rate on the latest bonds issued by a firm.

is equivalent to the average current yield on all of a firm's outstanding bonds.

is based on the original yield to maturity on the latest bonds issued by a firm.

has to be estimated as it cannot be directly observed in the market.

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Question 17

Multiple Choice

The aftertax cost of debt generally increases when:
I)a firm's bond rating increases.
II)the market rate of interest increases.
III)tax rates decrease.
IV)bond prices rise.

Choose correct answer/s

I and III only

II and III only

I, II, and III only

II, III, and IV only

I, II, III, and IV

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Question 18

Multiple Choice

The cost of preferred stock is computed the same as the:

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pre-tax cost of debt.

return on an annuity.

aftertax cost of debt.

return on a perpetuity.

cost of an irregular growth common stock.

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Question 19

Multiple Choice

The cost of preferred stock:

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is equal to the dividend yield.

is equal to the yield to maturity.

is highly dependent on the dividend growth rate.

is independent of the stock's price.

decreases when tax rates increase.

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Question 20

Multiple Choice

The capital structure weights used in computing the weighted average cost of capital:

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are based on the book values of total debt and total equity.

are based on the market value of the firm's debt and equity securities.

are computed using the book value of the long-term debt and the book value of equity.

remain constant over time unless the firm issues new securities.

are restricted to the firm's debt and common stock.

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Cost Of Capital

A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith,Inc.What is the return that these individuals require on this investment called?

Textile Mills borrows money at a rate of 13.5 percent.This interest rate is referred to as the:

The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:

When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project,the manager is utilizing the _____ approach.

A firm's cost of capital:

The weighted average cost of capital for a wholesaler:

Which one of the following is the primary determinant of a firm's cost of capital?

All else constant,which one of the following will increase a firm's cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of $1 a share and has a beta of 1.2.

A firm's overall cost of equity is:

The cost of equity for a firm:

The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?I)firms that have a 100 percent retention ratioII)firms that pay a constant dividendIII)firms that pay an increasing dividendIV)firms that pay a decreasing dividend

The dividend growth model:

Which one of the following statements related to the SML approach to equity valuation is correct? Assume the firm uses debt in its capital structure.

The pre-tax cost of debt:

The aftertax cost of debt generally increases when:I)a firm's bond rating increases.II)the market rate of interest increases.III)tax rates decrease.IV)bond prices rise.

The cost of preferred stock is computed the same as the:

The cost of preferred stock:

The capital structure weights used in computing the weighted average cost of capital:

The dividend growth model can be used to compute the cost of equity for a firm in which of the following situations?
I)firms that have a 100 percent retention ratio
II)firms that pay a constant dividend
III)firms that pay an increasing dividend
IV)firms that pay a decreasing dividend

The aftertax cost of debt generally increases when:
I)a firm's bond rating increases.
II)the market rate of interest increases.
III)tax rates decrease.
IV)bond prices rise.