Question 1 (1 point)

A company's cost of capital is used as a tool in relation to which aspect of financial policy?

Question 1 options:

Diversifying a company's porfolio

Hedging a company's investments.

Valuing projects by discounting cash flows, and then selecting projects with the highest return.

Evaluating a company's capital structure.

Question 2 (1 point)

A company has a risk free rate of 3% and a risk premium of 6%. Its tax rate is 35%. What is the company's cost of debt?

Question 2 options:

3.9%

2.1%

5.85%

3.15%

Question 3 (1 point)

A company has issued preferred stock that are valued at $75 a share. The preferred dividend is $5. The company's growth rate is 5%. What is the cost of the company's preferred stock?

Question 3 options:

6.67%

11.67%

5%

1.67%

Question 4 (1 point)

A company issues common equity and has a beta of 1.5. The risk free return is 3% and the market return is 7%. What is the company's cost of common equity?

Question 4 options:

13.5%

9%

6%

7%

Question 5 (1 point)

A company is thinking of issuing more common stock. Its stock's current market price is $50 a share with a dividend of $3 a share. The company has a 5% growth rate and a flotation cost of 10%. What is the company cost of new common stock?

Question 5 options:

16.3%

11.67%

6.67%

65%

Question 6 (1 point)

A company has retained earnings of $1.5 million and net income of $8 million. What is the retention rate?

Question 6 options:

0.1875

0.1825

08125

.01875

Question 7 (1 point)

Which of the following interpretations of data related to a Security Market Line (SML) is correct?

Question 7 options:

All of these answers.

If an asset is priced at a point below the SML, it is undervalued.

If an asset's value lies on the SML, it is correctly priced.

If an asset is priced at a point above the SML it is overvalued.

Question 8 (1 point)

In the capital asset pricing model (CAPM), you derive a stock's:

Question 8 options:

Beta

Expected return (or cost of capital)

Beta, expected return (or cost of capital), and equity premium

Equity Premium

Question 9 (1 point)

In order to compute the statistical values in the capital asset pricing model (CAPM), you need information over time about:

Question 9 options:

The rate of return of a risk-free asset, the overall stock market return, and a company's rate of return.

an overall stock market rate of return.

a rate of return from a risk-free asset (like the 90-day U.S. Treasury bill rate).

a company's rate of return.

Question 10 (1 point)

Which of the following is NOT a way weighted average cost of capital (WACC) is used to analyze a company's financial activities?

Question 10 options:

WACC influences how a company's capital structure is balanced.

WACC is the minimum rate of return a company must earn on a new venture.

All of these answers.

WACC is the rate a company is expected to pay, on average, to its security holders.

Question 11 (1 point)

Suppose that a company has total financing where 10% comes from bonds, 10% from a loan, and 80% from shareholders' equity. The bonds pay on average a 10% interest rate, the loan has a 10% interest rate, and shareholders require a 10% return. What is the weighted average cost of capital (WACC) equal to?

Question 11 options:

0.3333

0.3

0.1

0.0333

Question 12 (1 point)

Which of the following is a function of corporate capital budgeting?

Question 12 options:

To evaluate the performance of managers.

All of these answers.

To encourage managers to consider problems before they arise.

To rank projects by profitability.

Question 13 (1 point)

Which of the following is a correct definition of Net Present Value.

Question 13 options:

All of these answers.

The sum of the present values of all a project's revenues and expenses.

NPV = PVinflows + PVoutflows

A means of evaluating a project's profitability.

Question 14 (1 point)

Which of the following reasons is a reason why a higher discount rate generally means a lower NPV?

Question 14 options:

All of these answers.

When the discount rate is large, there are larger differences between PV and FV for each cash flow.

Most projects do not pay off until years later, and those cash flows are highly discounted.

A higher discount rate emphasizes earlier cash flows, which is when the expenses are incurred.

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