MCQ'S:

1) Determine the pure project beta of a project that has 30% debt and 70% equity. The beta for the company is 1.4, and it has a tax rate of 40%.

a.1.11

b.1.83

c.1.05

d.1.56

2) In many instances, book value, rather than market value, may be used to determine the weighted average cost of capital. This is because of all of the following EXCEPT __,

a.many firms have several different issues of debt which may not be publicly held

b.the market prices of the various sources of capital are not easily estimated

c.market values change daily

d.book value is a more accurate value in determining the actual cost of capital

3) For firms subject to the 40% marginal tax rate, the after-tax cost of __ is roughly three-fifths the cost of preferred stock.

a.retained earnings

b.new common stock

c.long-term debt

d.None of these are correct

4) Determine how much you would be willing to pay for a bond that pays $60 annual interest indefinitely and never matures (i.e., a perpetuity), assuming you require an 8 percent rate of return on this investment.

a.$480

b.$743

c.$1,000

d.$750

5) If a firm adopts a large proportion of above-average-risk investment projects that are not offset by below-average-risk investment projects, __.

a.its cost of capital will fall

b.the average risk premium for the firm will decline

c.the risk-free rate will increase as more risk is added

d.its cost of capital will rise

6) Alpha Products maintains a capital structure of 40% debt and 60% common equity. To finance its capital budget for next year, the firm will sell $50 million of 11% debentures at par and finance the balance of its $125 million capital budget with retained earnings. Next year Alpha expects net income to grow 7% to $140 million, and dividends also are expected to increase 7% to $1.40 per share and to continue growing at that rate for the foreseeable future. The current market value of Alpha's stock is $30. If the firm has a marginal tax rate of 40%, what is its weighted cost of capital for the coming year?

a.11.67%

b.9.84%

c.9.64%

d.8.63%

7) If a firm sells assets, generating cash flows, the cost of these funds is __.

a.the firm's cost of equity

b.zero

c.the firm's cost of cash flows

d.the firm's weighted cost of capital

8) Calculate the weighted average cost of capital for Limp Linguini Noodle Makers Inc. under the following conditions:

*The capital structure is 40% debt and 60% equity.

*The before-tax cost of debt (which includes flotation costs) is 20% and the firm is in the 40% tax bracket.

*The firms beta is 1.7.

*The risk-free rate is 7% and the market risk premium is 6%.

a.18.7%

b.17.2%

c.12%

d.15.12%

9) 1st Bank offers you a car loan at an annual interest rate of 10% compounded monthly. What effective annual interest rate is the bank charging you?

a.10.47%

b.10.45%

c.10.38%

d.10.42%

10) Depreciation __.

a.does not affect profits

b.is a cash inflow

c.does not affect cash flows

d.is not a cash outflow