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Multiple Choice Quiz
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1

The term cost of capital for a project depends on:
A)The use to which the capital is put, i.e. the project
B)The company's cost of capital
C)The industry cost of capital
D)All of the above
2

If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely?
A)Rejecting good low risk projects
B)Accepting poor high-risk projects
C)Both A and B
D)Neither A nor B
3

Using the company cost of capital to evaluate a project is:
A)Always correct
B)Always incorrect
C)Correct for projects that are about as risky as the average of the firm's other assets
D)None of the above
4

Which of the following type of projects has the lowest risk?
A)Speculation ventures
B)New products
C)Expansion of existing business
D)Cost improvement with known technology
5

Hurdle rate for capital budgeting decisions is:
A)The cost of capital
B)The cost of debt
C)The cost of equity
D)All of the above
6

When a firm increases debt in the capital structure:
A)Expected return onto firm's assets increases
B)Expected return on the firm's common stocks increases
C)The IRAs of the new projects increase
D)All of the above
7

If a company changes its financial structure:
A)The required rate return on its debt will not change
B)The required rate of return on the equity will not change
C)The required rate of return on the assets will not change
D)All of the above
8

The market value of Charter Cruise Company's equity is $15 million, and the market value of its risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt is 8%, calculate the company's cost of capital. (Assume no taxes.)
A)17%
B)20%
C)8.1%
D)None of the above
9

The beta of debt is 0.4 and beta of equity is 1.2. The debt-equity ratio is 0.8. Calculate the beta of the assets of the firm. (Assume no taxes.)
A)0.95
B)0.48
C)1.6
D)None of the above
10

A project has an expected cash flow of $300 in year 3. The risk-free rate is 5%, the market risk premium is 8% and the project's beta is1.25. Calculate the certainty equivalent cash flow for year3.
A)$228.35
B)$197.25
C)$300
D)None of the above
11

The company cost of capital is the correct discount rate for any project undertaken by the company.
A)True
B)False
12

Estimates of the company's cost of capital should be based on the beta of the firm's assets.
A)True
B)False
13

Firms with cyclical revenues tend to have lower asset betas.
A)True
B)False
14

Firms with high operating leverage tend to have higher asset betas.
A)True
B)False
15

Risky projects can be evaluated by discounting the expected cash flows at a risk-adjusted discount rate.
A)True
B)False





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