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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 types of projects is likely to have 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 | |
If you graph common stock returns on the Y axis and market returns on the X-axis, the slope of the regression line is: |
| | A) | Alpha |
| | B) | Beta |
| | C) | Security market line |
| | D) | None of the above |
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| 7 | |
A company has a cost of capital of 15%. However, it is introducing a new product that it considers to be a very risky endeavor. What can you say about the appropriate discount rate for the project? |
| | A) | The rate used should be 15% |
| | B) | The rate used should be lower than 15% |
| | C) | The rate used should be greater than 15% |
| | D) | The rate used should be between 12% and 18% |
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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 | |
A project has an expected risky cash flow of $1,000 in Year 1. The risk-free rate is 4%, the market rate of return is 12%, and the project's beta is 1.5. Calculate the certainty equivalent cash flow for Year 1. |
| | A) | $896.55 |
| | B) | $862.07 |
| | C) | $828.91 |
| | 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 | |
Which of the following are valid ways to discount a risky cash flow, C1? |
| | A) | Discount the risky cash flow at the risk-free rate |
| | B) | Discount the risky cash flows at a risk-adjusted discount rate that is less than the risk-free rate |
| | C) | Find the certainty-equivalent cash flow and discount it at the risk-adjusted discount rate |
| | D) | Find the certainty-equivalent cash flow and discount it at the risk-free rate |
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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 | |
Distant cash flows are riskier; therefore, they should be discounted at a higher rate than earlier cash flows. |
| | A) | True |
| | B) | False |
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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 | |
Some countries have extremely volatile stock markets but are still low-beta investments for an investor holding the US market. |
| | A) | True |
| | B) | False |
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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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