Practice Questions
1. Scanlon Inc.'s CFO hired you as a consultant to help her estimate the cost
of capital.
You have been provided with the following data:
r
RF
= 5.00%; RP
M
= 6.00%; and b = 0.90.
Based on the CAPM approach, what is the cost of
equity from retained earnings?
a.
9.21%
b.
9.49%
c.
9.79%
d.
10.09%
e.
10.40%
Answer: e
2. Assume that you are a consultant to Broske Inc., and you have been
provided with the following data:
D
1
= $1.30; P
0
= $42.50; and g = 7.00%
(constant).
What is the cost of equity from retained earnings based on the
DCF approach?
a.
9.08%
b.
9.56%
c.
10.06%
d.
10.56%
e.
11.09%
Answer: c
3. Lanser Inc. hired you as a consultant to help them estimate its cost of
capital.
You have been provided with the following data:
D
1
= $0.80; P
0
=
$22.50; and g = 5.00% (constant).
Based on the DCF approach, what is the
cost of equity from retained earnings?
a.
7.34%
b.
7.72%
c.
8.13%
d.
8.56%
e.
8.98%
Answer: d
4. Which of the following statements is CORRECT?
a. If the underlying stock does not pay a dividend, it makes good
economic sense to exercise a call option as soon as the
stock’s price exceeds the strike price by about 10%, because
this permits the option holder to lock in an immediate profit.
b. Call options generally sell at a price less than their
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 Summer '10
 Lee
 Cost Of Capital, Strike price

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