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Chapter 12THE COST OF CAPITAL MULTIPLE CHOICE 1. The Institutional Brokers' Estimate Service (IBES) summarizes analysts' _______. a. short-term earnings forecasts b. long-term earnings growth rates c. bankruptcy forecasts d. short-term earnings forecasts and long-term earnings growth rates ANS: D PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital TOP: Issues in implementation 2. Studies analyzing the historical returns earned by common stock investors have found that the returns from average risk common stock investments over the years have averaged (arithmetically) _______ percentage points _______ than the returns on Treasury bills. a. 6 to 8, higher b. 1 to 2, lower c. 3 to 4, higher d. 8 to 9, higher ANS: D PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Capital asset pricing model approach 3. The cost of equity capital for non-dividend paying stocks can be determined by a. using the Capital Asset Pricing Model b. estimating k e for comparable dividend-paying stocks in their industry c. forecasting the liquidation proceeds from the sale of the company's assets. d. using the CAPM and by estimating k e for comparable dividend-paying stocks in their industry ANS: D PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital; Understand risk and return TOP: Risk premium on debt & other approaches for estimating... 4. For a company that is not planning to change its target capital structure, the proportions of debt and equity used in calculating the weighted cost of capital should be based on the current _______ weights of the individual components. a. book value b. market value c. replacement value d. accounting value ANS: B PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital TOP: Determining the weighted cost of capital schedule 5. The cost of capital is a. the rate of return required by investors in the firm's securities b. the minimum rate of return required on new investments of high risk undertaken by the firm c. approximately 10 percent for most firms d. concerned with plant and equipment only ANS: A PTS: 1 OBJ: TYPE: Fact NAT: Reflective thinking LOC: Knowledge of capital budgeting and cost of capital TOP: Introduction 6. A firm can raise up to $700 million for investment from a mixture of debt, preferred stock and retained equity. Above $700 million, the firm must issue new common stock. Assuming that debt costs and preferred stock costs remain unchanged, the marginal cost of capital for amounts up to $700 million will be _______ the marginal cost of capital for amounts over $700 million.... View Full Document

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