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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 |
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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 |
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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 |
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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 |
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5 | |
The 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 |
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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 |
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7 | |
If a company changes its financial structure: |
| | A) | The required rate of 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 |
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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 |
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9 | |
The beta of debt is 0.4 and beta of equity is 1.2. The debt-equity ration is 0.8. Calculate the beta of the assets of the firm. (Assume no taxes.) |
| | A) | 0.9 |
| | B) | 0.48 |
| | C) | 1.6 |
| | D) | None of the above |
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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 is 1.25. Calculate the certainty equivalent cash flow for year 3. |
| | A) | $228.35 |
| | B) | $197.25 |
| | C) | $300 |
| | D) | None of the above |
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11 | |
The company cost of capital is the correct discount rate for any project undertaken by the company. |
| | A) | True |
| | B) | False |
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12 | |
Estimates of the company's cost of capital should be based on the beta of the firm's assets. |
| | A) | True |
| | B) | False |
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13 | |
Firms with cyclical revenues tend to have lower asset betas. |
| | A) | True |
| | B) | False |
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14 | |
Firms with high operating leverage tend to have higher asset betas. |
| | A) | True |
| | B) | False |
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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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16 | |
Which of the following type of projects has the highest risk? |
| | A) | Speculation ventures |
| | B) | New products |
| | C) | Expansion of existing business |
| | D) | Cost improvement |
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17 | |
A company valuing a new line of business should use as its discount rate that rate which is |
| | A) | prevailing in the firm |
| | B) | prevailing in the industry |
| | C) | charged by the bank |
| | D) | the rate of return expected by bond holders |
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18 | |
The cost of capital for a firm is higher using book value than market values given that the firm has a book value D/V ratio of 20% and a market value D/V ratio of 40%. |
| | A) | True |
| | B) | False |
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19 | |
What is the cost of capital for a firm with market value of debt of $20 million and market value of equity of $60 million, given a cost of equity at 12% and a cost of debt at 6%? Assume no taxes. |
| | A) | 6% |
| | B) | 8.5% |
| | C) | 10.5% |
| | D) | 12% |
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20 | |
What is the asset beta given the debt beta is .2, the equity beta is 1.4, the market value of equity is $45 million, and the market value of debt is $15 million? |
| | A) | .2 |
| | B) | 1.10 |
| | C) | 1.40 |
| | D) | 1.42 |
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21 | |
What is the cost of capital for a firm with market value of debt of $10 million and market value of equity of $90 million, given a cost of equity at 10% and a cost of debt at 4%? Assume no taxes. |
| | A) | 6.4% |
| | B) | 7.4% |
| | C) | 8.4% |
| | D) | 9.4% |
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22 | |
What is the asset beta given the debt beta is 0.0, the equity beta is 2.1, the market value of equity is $60 million, and the market value of debt is $30 million? |
| | A) | .2 |
| | B) | 1.10 |
| | C) | 1.40 |
| | D) | 1.42 |
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23 | |
The book value of equity and debt should be used to calculate the company cost of capital. |
| | A) | True |
| | B) | False |
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