Site MapHelpFeedbackFundamentals of Corporate Finance: Multiple Choice Quiz
Multiple Choice Quiz
(See related pages)



1

You need to compute the cost of equity capital for a firm that is traded on the New York Stock Exchange. Which of the following would likely be least helpful to you?
A)The rate of return on stocks of similar risk
B)A copy of the Wall Street Journal from six months ago
C)An investment publication that provides an estimate of the firm's beta
D)An investment survey that projects future dividend growth rates for the firm
E)A data set containing dividends paid for the past ten years
2

You are analyzing a financial manager's estimate of the cost of equity capital for a project. Which of the following is NOT accurate given the estimate was prepared using the SML approach?
A)The SML applies only to firms with stable dividend growth rates
B)Like the dividend growth model, the SML generally relies on using the past to predict the future
C)Unlike the dividend growth model, the SML estimate is adjusted for risk
D)To implement this approach, the financial manager had to estimate a market risk premium and a beta coefficient
E)The quality of the estimate from the SML approach is sensitive to the quality of the estimates of the variables in the model
3

The cost of debt capital for a firm __________.
A)is the return that the firm's creditors demand on new borrowing
B)can be calculated by estimating the beta of the firm's equity and then using the SML
C)can be estimated by finding the yield on recently issued, longer maturity bonds with a lower bond rating
D)can be calculated by looking at the coupon rates on existing bonds of similar risk
E)can be observed directly even if the firm's bonds are not publicly traded
4

Which of the following is NOT true regarding a firm's cost of debt?
A)The cost of debt is the return the firm's creditors demand on new borrowing
B)The firm's cost of debt based on its past borrowing is known as its embedded debt cost
C)It is possible to determine a firm's cost of debt by observing yields on similar bonds that were recently issued
D)The coupon rate on outstanding debt is not necessarily the firm's current cost of debt
E)A firm's cost of equity is generally easier to calculate than the firm's cost of debt
5

Which of the following is NOT a legitimate reason it is generally considered easier to estimate the cost of preferred stock than it is to estimate the cost of common stock?
A)Preferred stock generally carries with it a fixed dividend payment
B)Preferred stock is often rated for default risk
C)The cost of preferred stock can be calculated as a perpetuity based on the fixed dividend payment and the present price
D)Calculation of the cost of preferred stock does not require any information about future preferred dividends
E)The cost of preferred stock is simply equal to its dividend yield
6

Calculation of the weighted average cost of capital requires all of the following EXCEPT _______________.
A)determination of the total market value of a firm's debt by determining the number of bonds outstanding and the current par value per bond
B)determination of the market value of bonds outstanding relative to total market value of the firm
C)determination of the corporate tax rate
D)determination of the current market value of a firm's equity by finding the total number of shares and the market value per share
E)determination of the market value of equity outstanding relative to total market value of the firm
7

All else equal, a higher corporate tax rate ________.
A)will increase the WACC of a firm with debt and equity in its capital structure
B)will decrease the WACC of a firm with debt in its capital structure
C)will not affect the WACC of a firm with debt in its capital structure
D)will decrease the WACC of a firm with only equity in its capital structure
E)will change the WACC of a firm with debt in its capital structure, but the direction of the change cannot be determined without more information
8

Which of the following is NOT correct? (Note: tc is the marginal tax rate.)
A)The WACC is equal to the firm's embedded debt cost multiplied by (1 - tc)
B)The WACC requires the cost of debt be decreased by 1 - tc
C)The WACC is not directly observable in financial markets
D)The WACC is the required return on any investments a firm makes that have a level of risk equal to that of present operations
E)The WACC represents the risk and target capital structure of a firm's existing assets as a whole
9

Why is it necessary to make sure a project is in the same risk class as existing operations before using the WACC as the discount rate?
A)If a project will decrease risk, then it should be rejected
B)A firm that uses the WACC of existing operations to evaluate projects without regarding the risk class of the project will tend to become riskier over time
C)Only projects with risk similar to that of present operations can result in positive NPV's
D)A project that is in a different risk class must be analyzed using the WACC of the firm's existing operations
E)In general, the risk class of a proposed project is important only when it affects the firm's bond ratings
10

In which of the following cases would it most likely be appropriate to use the WACC that relates to existing operations?
A)A pizza delivery service is planning to expand by adding a sit-down pizza restaurant
B)A grocery store owner is considering adding a bakery and a delicatessen to his store
C)A gas tank manufacturer is contemplating switching to manufacturing tie-outs for dogs
D)A gas station owner is considering adding a convenience store
E)A manufacturer of garbage bags is considering expanding production capacity to meet increasing overseas demand





To learn more about the book this website supports, please visit its Information Center.
(c)2003 McGraw-Hill Higher Education
Any use is subject to the Terms of Use and Privacy Policy.
McGraw-Hill Higher Education is one of the many fine businesses of The McGraw-Hill Companies.


Fundamentals of Corporate FinaOnline Learning Center with Powerweb

Home > Chapter 15 > Multiple Choice Quiz