1 - What is economic cost?

A) The opportunity cost less the explicit costs

B) The same as opportunity cost

C) The total of all explicit and implicit costs

D) The total revenue less total costs

2- Why is equity capital generally more expensive than debt financing?

A) Dividends fluctuate more than interest rates.

B) Interest on bonds is a legal obligation.

C) Investors expect to be paid more for exposure to higher risk.

D) Investors have a greater demand for equity investments than for debt investments.

3 - An appropriate level of working capital is determined by

A) Balancing the probability of insolvency against the profitability of current assets and liabilities.

B) Evaluating the capital structure and dividend policy.

C) Evaluating the capital leases used to finance fixed assets.

D) Minimizing long-term debt because it is more expensive than short-term debt.

4 - Which of the following objectives is consistent with an optimal capital structure?

A) Maximize earnings per share

B) Maximize the total value of the entity

C) Minimize the cost of debt

D) Minimize the cost of equity

5 - Lemur Companys $10 par value common stock currently sells at $100 per share. Lemur has retained earnings of $100,000; once this is exhausted, Lemur will raise any more necessary equity capital through a stock issue. Lemur can raise cash by selling common stock at a $2 per share discount with a $3 per share floatation cost. Annual cash dividends are $7 per share and are not expected to change. The estimated after-tax cost of funds raised by long-term bonds is 5%. The estimated cost of funds raised by preferred stock is 6%. Lemurs preferred capital structure is 30% long-term debt, 20% preferred stock, and 50% common stock. Not counting the $100,000 of retained earnings, the current capital structure is Lemurs preferred structure. What would be Lemurs cost of funds from a common stock sale?

A) 7.00%

B) 7.14%

C) 7.22%

D) 7.37%

6 - Aardvark Companys beta coefficient is 1.2. The current rates for U.S. treasury bonds and expected corporate returns are 7% and 12%, respectively. What is Aardvarks approximate expected rate of return using the capital asset pricing model (CAPM)?

A) 8.4%

B) 10.6%

C) 13.0%

D) 14.4%

7- Controllable revenues would be included in the performance reports of which of the following types of responsibility centers?

Cost centers ,Investment centers

A) Yes, No

B) Yes, Yes

C) No, No

D) No, Yes

8 - In which of the following situations would there be inelastic demand?

A) A 5 percent price increase results in a 3 percent decrease in the quantity demanded.

B) A 4 percent price increase results in a 6 percent decrease in the quantity demanded.

C) A 4 percent price increase results in a 4 percent decrease in the quantity demanded.

D) A 3 percent price decrease results in a 5 percent increase in the quantity demanded.