Assignment
Question 1
A company's cost of capital is used as a tool in relation to which aspect of financial policy?
Evaluating a company's capital structure.
Valuing projects by discounting cash flows, and then selecting projects with the highest return.
Diversifying a company's porfolio
Hedging a company's investments.
Question 2
A company has a risk free rate of 3% and a risk premium of 6%. Its tax rate is 35%. What is the company's cost of debt?
5.85%
3.15%
2.1%
3.9%
Question 3
A company has issued preferred stock that are valued at $75 a share. The preferred dividend is $5. The company's growth rate is 5%. What is the cost of the company's preferred stock?
6.67%
1.67%
5%
11.67%
Question 4
A company issues common equity and has a beta of 1.5. The risk free return is 3% and the market return is 7%. What is the company's cost of common equity?
9%
13.5%
6%
7%
Question 5
A company is thinking of issuing more common stock. Its stock's current market price is $50 a share with a dividend of $3 a share. The company has a 5% growth rate and a flotation cost of 10%. What is the company cost of new common stock?
16.3%
11.67%
65%
6.67%
Question 6
A company has retained earnings of $1.5 million and net income of $8 million. What is the retention rate?
08125
.01875
0.1875
0.1825
Question 7
Which of the following interpretations of data related to a Security Market Line (SML) is correct?
If an asset's value lies on the SML, it is correctly priced.
If an asset is priced at a point above the SML it is overvalued.
If an asset is priced at a point below the SML, it is undervalued.
All of these answers.
Question 8
In the capital asset pricing model (CAPM), you derive a stock's:
Beta
Equity Premium
Beta, expected return (or cost of capital), and equity premium
Expected return (or cost of capital)
Question 9
In order to compute the statistical values in the capital asset pricing model (CAPM), you need information over time about:
a rate of return from a risk-free asset (like the 90-day U.S. Treasury bill rate).
an overall stock market rate of return.
a company's rate of return.
The rate of return of a risk-free asset, the overall stock market return, and a company's rate of return.
Question 10
Which of the following is NOT a way weighted average cost of capital (WACC) is used to analyze a company's financial activities?
WACC is the minimum rate of return a company must earn on a new venture.
WACC influences how a company's capital structure is balanced.
WACC is the rate a company is expected to pay, on average, to its security holders.
All of these answers.
Question 11
Suppose that a company has total financing where 10% comes from bonds, 10% from a loan, and 80% from shareholders' equity. The bonds pay on average a 10% interest rate, the loan has a 10% interest rate, and shareholders require a 10% return. What is the weighted average cost of capital (WACC) equal to?
0.1
0.3333
0.3
0.0333
Question 12
Which of the following is a function of corporate capital budgeting?
To evaluate the performance of managers.
To rank projects by profitability.
To encourage managers to consider problems before they arise.
All of these answers.
Question 13
You are analyzing two different investments and will present your findings to company executives. Both projects have cash flows that alternate between positive and negative. Which budgeting method should you use to evaluate the projects?
Modified Internal Rate of Return.
Internal Rate of Return
Payback Period Method
Profitability index
Question 14
Which of the following is a correct definition of Net Present Value.
The sum of the present values of all a project's revenues and expenses.
A means of evaluating a project's profitability.
NPV = PVinflows + PVoutflows
All of these answers.
Question 15
Which of the following reasons is a reason why a higher discount rate generally means a lower NPV?
Most projects do not pay off until years later, and those cash flows are highly discounted.
A higher discount rate emphasizes earlier cash flows, which is when the expenses are incurred.
When the discount rate is large, there are larger differences between PV and FV for each cash flow.
All of these answers.