1.

The cost of each type of capital depends on

A) risk-free cost of that type of funds. B) business risk of the firm. C) financial risk of the firm. D) All of the above.

2.

The firm has a beta of 1.2. The market return equals 14% and the risk-free rate of return equals 6%. The estimated cost of common stock equity is

A) 6%. B) 7.2%. C) 14%. D) 15.6%.

3.

Risk aversion is the behavior exhibited by managers who require greater than proportional ____________

A) increase in return, for a given decrease in risk. B) increase in return, for a given increase in risk. C) decrease in return, for a given increase in risk. D) decrease in return, for a given decrease in risk.

4.

Generally, the order of cost, form the least expensive to the most expensive, for long-term capital of a corporation is

A) new common stock, retained earnings, preferred stock, long-term debt. B) common stock, preferred stock, long-term debt, short-term debt. C) preferred stock, retained earnings, common stock, new common stock. D) long-term debt, preferred stock, retained earnings, new common stock.

5.

Greater risk aversion results in lower required returns for each level of risk, wheras a reduction in risk aversion would cause the required return for each level of risk to increase.

A) True B) False

6.

The cost of retained earnings is

A) zero. B) equal to the cost of a new issue of common stock. C) equal to the cost of common stock equity. D) irrelevant to the investment/financing decision.

7.

A change in the risk-free rate would NOT be due to

A) an international trade embargo. B) a change in Federal Reserve policy. C) foreign competition in the firm's product market area. D) none of the above

8.

The preferred capital structure weights to be used in the weighted average cost of capital are

A) market weights. B) nominal weights. C) historic weights. D) target weights.

9.

The investment opportunity schedule combined with the weighted marginal cost of capital indicates

A) those projects that a firm should select. B) those projects that will result in the highest cash flows. C) which projects are acceptable given the firm's cost of capital. D) which combination of projects will fit within the firm's capital budget.

10.

The weighted average cost that reflects the interrelationship of financing decisions can be obtained by weighing the cost of each source of financing by its target proportion in the firm's capital structure.

A) True B) False

11.

The beta coefficient is an index of the degree of movement of an asset's return in response to a change in the risk-free asset return.

A) True B) False

12.

The specific cost of each source of long-term financing is based on _____ and _____ costs.

A) before-tax; historical B) after-tax; historical C) before-tax; book value D) after-tax; current

13.

An investment advisor has recommended a $50,000 portfolio containing assets R, J and K; $25,000 will be invested in R with an expected annual return of 12%; $10,000 will be invested in asset J, with an expected annual return of 18%; and $15,000 will be invested in asset K, with an expected annual return of 8%. The expected annual return of this portfolio is

A) 12.67% B) 12.00% C) 10.00% D) unable to be determined from the information provided

14.

In comparing the constant growth model and the capital asset pricing model (CAPM) to calculate the cost of common equity,

A) the constant growth model ignores risk, while the CAPM directly considers risk as reflected in the beta. B) the CAPM indirectly considers risk as reflected in the market return, while the constant growth model uses dividend expectations as a reflection of risk. C) the CAPM directly considers risk as reflected in teh beta, while the constant growth model uses dividend expectations as a reflection of risk. D) the CAPM directly considers risk as reflected in the beta, while the constant growth model uses the market price as a reflection of the expected risk-return preferences of investors.

15.

Given that the cost of common stock is 18%, dividends are $1.50 per share, and the price of the stock is $12.50 per share, what is the annual growth rate of dividends?

A) 4% B) 5% C) 6% D) 8%

16.

The _____ portfolio maximizes return for a given level of risk, or minimizes risk for a given level of return.

A) efficient B) coefficient C) continuous D) risk-indifferent

17.

Changes in risk aversion and therefore shifts in the SML, result from changing tastes and preferences of investors, which generally result fro various economic, political and social events.

A) True B) False

18.

When the U.S. currency gains in value, the dollar value of a foreign-currency-denominated portfolio of assets decline.

A) True B) False

19.

Combining two negatively correlated assets to reduce risk is known as

A) diversification. B) valuation. C) liquidation. D) risk aversion.

20.

When determining the after-tax cost of a bond, the face value of the issue must be adjusted to the net proceeds amounts by considering

A) the risk. B) the flotation costs. C) the approximate returns. D) the taxes.