The cost of new common equity willQuestion 1 options:a)Increase as flotation

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The cost of new common equity will

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Question 1 options:

a) 

Increase as flotation

costs increase

b) 

Decrease as flotation costs increase

c) 

Increase as flotation costs decrease

d) 

Increase as the tax rate increases

Question 2 (2 points)

Assuming no change to a company’s overall risk level, if a project’s return equals the company’s cost of capital

Question 2 options:

a) 

It should increase the company’s stock price (build shareholder wealth)

b) 

It should maintain the company’s stock price (maintain shareholder wealth)

c) 

It should decrease the company’s stock price (destroy shareholder wealth)

d) 

We can’t predict its impact on the company’s stock price

Question 3 (2 points)

Issues of new stock, either common or preferred, have a higher cost due to

Question 3 options:

a) 

Flotation costs associated with the new issues

b) 

Shareholder expectations the new issue should lead to higher returns

c) 

Increased risk in the company’s capital structure

d) 

Risk of dilution of future earnings

Question 4 (2 points)

Assuming no change to a company’s overall risk level, if a project’s return exceeds the company’s cost of capital

Question 4 options:

a) 

It should increase the company’s stock price (build shareholder wealth)

b) 

It should maintain the company’s stock price (maintain shareholder wealth)

c) 

It should decrease the company’s stock price (destroy shareholder wealth)

d) 

We can’t predict its impact on the company’s stock price

Question 5 (2 points)

As the amount of financing increases,

Question 5 options:

a) 

The cost of capital may increase

b) 

The cost of capital may decrease

c) 

The cost of capital would not be impacted

d) 

We don’t have enough information to determine

Question 6 (2 points)

If a company is considering a new project and will finance it entirely by common equity, the project should be measured against

Question 6 options:

a) 

The cost of equity

b) 

The cost of debt

c) 

The cost of preferred equity

d) 

The weighted average cost of capital

Question 7 (2 points)

Marginal cost of capital is

Question 7 options:

a) 

A measure of the volatility of returns on an individual stock relative to the market

b) 

Relates the risk-return trade-offs of individual assets to the market returns

c) 

The computed cost of capital determined by multiplying the cost of each item in the optimal capital structure by its weighted presentation in the overall capital structure and summing up the results

d) 

The cost of the last dollar of funds raised

Question 8 (2 points)

We use Kn = (D1 / (P0 – F)) + g to calculate

Question 8 options:

a) 

The after-tax cost of debt

b) 

Cost of common equity

c) 

Cost of new common stock

d) 

Cost of preferred stock

Question 9 (2 points)

Retained earnings

Question 9 options:

a) 

Is one of the most important sources of capital for a company

b) 

Has a higher cost than debt

c) 

Also represents the cost of common equity

d) 

All of these apply

Question 10 (2 points)

The optimum capital structure

Question 10 options:

a) 

Provides the lowest cost of capital

b) 

Has the best mix of debt, preferred stock, and common equity

c) 

Can change over time as market and firm conditions change

d) 

All of these apply

Question 11 (2 points)

In calculating the cost of common equity using Ke = (D1 / P0) + g, D1 is the

Question 11 options:

a) 

Price of the stock today

b) 

Dividend at the end of the first year (or period)

c) 

Required rate of return

d) 

Constant growth rate in dividends

Question 12 (2 points)

A company with a WACC of 8.5% is considering two possible investments. Either will be financed by debt costing 6%, and Project A will return 8% and Project B will return 7%. Which project should the company undertake?

Question 12 options:

a) 

Project A

b) 

Project B

c) 

Neither project

d) 

Both projects

Question 13 (2 points)

In the capital asset pricing model, Kj = Rf + B(Km – Rf), Rf is the

Question 13 options:

a) 

Required return on common stock

b) 

Risk-free rate of return

c) 

Measure of the historical volatility of the stock compared to the market index

d) 

Return expected in the market

Question 14 (2 points)

Which of these would result in a lower after-tax cost of debt?

Question 14 options:

a) 

Increase in corporate tax rate

b) 

Decrease in corporate tax rate

c) 

Increase in the company’s risk level

d) 

None of these would lower the after-tax cost of debt

Question 15 (2 points)

The Capital asset pricing model is

Question 15 options:

a) 

A measure of the volatility of returns on an individual stock relative to the market

b) 

Relates the risk-return trade-offs of individual assets to the market returns

c) 

The computed cost of capital determined by multiplying the cost of each item in the optimal capital structure by its weighted presentation in the overall capital structure and summing up the results

d) 

The cost of the last dollar of funds raised



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