EXPLAIN YOUR ANSWER.

1.The Capital Asset Pricing Model (CAPM) states that the price of a share of stock is the present value of all its future cash dividends.*

True

False

2.The cost of debt is the cost associated with raising one more dollar by issuing debt.*

True

False

3.Unlevered cost of equity is the discount rate used in the adjusted present value model.*

True

False

4.The dividend valuation model (DVM) assumes an investor holds a diversified portfolio -- a collection of investments whose returns are not in synch with one another*

True

False

5.The volatility of an individual stock has significant effect on the volatility of a well-diversified portfolio.*

True

False

6.The beta for a private company is identical to the beta for a publicly held company as long as the two are of similar sizes in the same industry*

True

False

7.Under the weighted-average cost of capital, the discount rate for core operations is the weighted-average of the demanded return on all economic balance sheet items other than core operations.*

True

False

8.Like other sources of capital, common equity has a promised rate of return.*

True

False

9.Diversification eliminates systematic risk*

True

False

10.The cost of using funds; is also called hurdled rate, required rate of return, cut-off rate, opportunity cost of capital.*

True

False

MCQ

1.The beta in Capital asset Pricing Model*

Use to represent volatility of the market

Arbitrary risk coefficient

The pricing multiple used to compute for the cost of capital

The credit spread/debt premium added to risk free rate

2.In the capital asset pricing model formula, the additional expected return above the risk-free rate that an investor requires to hold an average-price stock is known as:*

historical equity premium earned

equity risk premium

beta

risk-free rate of interest

3.A company has made the decision to finance next year's capital projects through debt rather than additional equity. The benchmark cost of capital for these projects should be*

The cost of equity financing.

The weighted-average cost of capital.

The after-tax cost of new-debt financing.

The before-tax cost of new-debt financing.

4.The adjusted present value model uses the unlevered cost of equity as:*

a way to compute the levered betas required for the formula

a way to estimate the unlevered beta directly from stock returns

its discount rate

None of the above answers are correct.

5.When calculating a firm's cost of capital, all of the following are true except that*

All costs should be expressed as after-tax costs.

The time value of money should be incorporated into the calculations.

The cost of capital of a firm is the weighted average cost of its various financing components.

The calculation of the cost of capital should focus on the historical costs of alternative forms of financing rather than market or current costs

6.According to the capital asset pricing model (CAPM), the relevant risk of a security is its*

Company-specific risk.

Diversifiable risk.

Systematic risk.

Total risk.

7.The basis for measuring the cost of capital derived from bonds and preferred stock, respectively, is the*

after-tax rate of interest for bonds and stated annual dividend rate for preferred stock

pretax rate of interest for bonds and stated annual dividend rate for preferred stock

pretax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock

after-tax rate of interest for bonds and stated annual dividend rate less the expected earnings per share for preferred stock

8.A characteristic of the WACC is that:*

it is the discount rate used for the adjusted present value model

the only capital supplier considered in the WACC are debtholders

it is the discount rate used in the flows to equity valuation model

it blends the costs of equity and other sources of financing

9.The weighted average cost of capital represents the*

equivalent units of capital used by the organization.

overall cost of capital from all organization financing sources.

overall cost of dividends plus interest paid by the organization.

cost of bonds, preferred stock, and common stock divided by the three sources.

10.In computing the cost of capital, the cost of debt capital is determined by*

Interest rate times (1 - the firm's tax rate)

The capital asset pricing model.

Annual interest payment divided by the book value of the debt.

Annual interest payment divided by the proceeds from debt issuance.