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| 1 | |
The opportunity 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 these options |
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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 these options |
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| 4 | |
The company cost of capital is defined as: |
| | A) | The opportunity cost of a firm's new projects |
| | B) | The weighted cost of capital for a new project after deducting taxes |
| | C) | The expected return on the best projects available to a company |
| | D) | The expected return on a portfolio of all the company's existing securities |
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| 5 | |
True cost of capital depends on: |
| | A) | Project risk |
| | B) | The company undertaking the project |
| | C) | Market risk |
| | D) | All of these options |
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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 these options |
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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) | 10.5% |
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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) | $905.46 |
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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) | $300.00 |
| | D) | $278.65 |
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| 11 | |
Discount rate compensates for risk borne |
| | A) | Per project |
| | B) | Per quarter |
| | C) | Per year |
| | D) | Per period |
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| 12 | |
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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| 13 | |
A company cost of capital is quoted as 8%. The book value of debt and equity was used in the calculation. Which of the following adjustments to the calculation is most likely to cause an increase in the cost of capital? |
| | A) | Market value of debt is used. |
| | B) | Market value of equity is used. |
| | C) | Market value of debt and equity are both used. |
| | D) | There will be no change. |
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| 14 | |
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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| 15 | |
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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