chap015 - Chapter 015 Cost of Capital Multiple Choice...

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Chapter 015 Cost of Capital Multiple Choice Questions 1. The return shareholders require on their investment in a firm is called the: a. dividend yield. B . cost of equity. c. capital gains yield. d. cost of capital. e. income return. SECTION: 15.2 TOPIC: COST OF EQUITY TYPE: DEFINITIONS 2. The return lenders require on loaned funds to a firm is called the: a. coupon rate. b. current yield. C . cost of debt. d. capital gains yield. e. cost of capital. SECTION: 15.3 TOPIC: COST OF DEBT TYPE: DEFINITIONS 3. The weighted average of a firm's cost of equity and aftertax cost of debt is called the: a. reward to risk ratio. b. weighted capital gains rate. c. pure play cost of capital. d. subjective cost of capital. E . weighted average cost of capital. SECTION: 15.4 TOPIC: WACC TYPE: DEFINITIONS 15-1
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Chapter 015 Cost of Capital 4. When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach. a. subjective risk B . pure play c. divisional cost of capital d. capital adjustment e. security market line SECTION: 15.5 TOPIC: PURE PLAY APPROACH TYPE: DEFINITIONS 5. The cost of capital: a. will decrease as the risk level of a firm increases. b. is primarily dependent upon the source of the funds used for a project. c. implies a project will produce a positive net present value only when the rate of return on the project is less than the predetermined cost of capital. d. remains constant for all projects undertaken by the same firm. E . depends on how the funds are going to be utilized. SECTION: 15.1 TOPIC: COST OF CAPITAL TYPE: CONCEPTS 6. The overall cost of capital for a retail store: a. is equivalent to the aftertax cost of the firm's liabilities. b. should be used as the required return when analyzing a potential acquisition of a wholesale distributor. C . reflects the return investors require on the total assets of the firm. d. remains constant when the debt-equity ratio changes. e. is unaffected by changes in corporate tax rates. SECTION: 15.1 TOPIC: COST OF CAPITAL TYPE: CONCEPTS 15-2
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Chapter 015 Cost of Capital 7. The cost of capital primarily depends on the: a. debt-equity ratio. b. applicable tax rate. c. cost of equity financing. d. cost of debt. E . use of the funds. SECTION: 15.1 TOPIC: COST OF CAPITAL TYPE: CONCEPTS 8. Davis Entertainment is considering developing and distributing a new board game for children. The project is similar in risk to the firm's current operations. The firm maintains a debt-equity ratio of .45 and retains all profits to fund the firm's rapid growth. How should the firm determine its cost of equity? a. by adding the market risk premium to the aftertax cost of debt b. by treating the common stock as if it were preferred stock c. by using the dividend growth formula D . by using the security market line approach e. by averaging the cost determined by both the dividend growth formula and the security market line approach. SECTION: 15.2
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chap015 - Chapter 015 Cost of Capital Multiple Choice...

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