Question 1

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

Question 1 options:

Hedging a company's investments.

Diversifying a company's porfolio

Evaluating a company's capital structure.

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

SaveQuestion 2

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:

3.15%

2.1%

5.85%

3.9%

SaveQuestion 3

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%

1.67%

11.67%

5%

SaveQuestion 4

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:

9%

7%

6%

13.5%

SaveQuestion 5

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%

SaveQuestion 6

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

Question 6 options:

0.1825

08125

0.1875

.01875

SaveQuestion 7

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

Question 7 options:

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

All of these answers.

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

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

SaveQuestion 8

In the capital asset pricing model (CAPM), you derive a stocks:

Question 8 options:

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

Equity Premium

Expected return (or cost of capital)

Beta

SaveQuestion 9

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

Question 9 options:

an overall stock market rate of return.

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

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

a companys rate of return.

SaveQuestion 10

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.

All of these answers.

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

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

SaveQuestion 11

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. The interest payment on the loan is tax deductible and the tax rate is 20%. What is the simple average cost of capital equal to?

Question 11 options:

0.10

0.073

0.098

0.033

SaveQuestion 12

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 12 options:

0.0333

0.3333

0.1

0.3

SaveQuestion 13

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

Question 13 options:

To encourage managers to consider problems before they arise.

To rank projects by profitability.

To evaluate the performance of managers.

All of these answers.

Save

Question 14

Which of the following is the correct order of steps in a basic accounting flow?

Question 14 options:

Analyze the transactions, make journal entries, make adjusting entries, prepare statements.

Make journal entries, analyze the transactions, make adjusting entries, prepare statements.

Analyze the transactions, make journal entries, prepare statements, make adjusting entries.

Make journal entries, prepare statements, analyze the transactions, make adjusting entries.

SaveQuestion 15

You are analyzing two different investments and will present your findings to company executives. Both projects have cash flows that alternate between positive and negative. Which budgeting method should you use to evaluate the projects?

Question 15 options:

Modified Internal Rate of Return.

Net Present Value

Payback Period Method

Internal Rate of Return

SaveQuestion 16

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

Question 16 options:

NPV = PVinflows + PVoutflows

All of these answers.

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

A means of evaluating a project's profitability.

SaveQuestion 17

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

Question 17 options:

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

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

All of these answers.

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

SaveQuestion 18

A company is considering a project that has a discount rate of 5%. In the first year, it will have -$100,000 in cash flows. In year 2, it will have cash flows of $100,000, and in year 3 the project will generate $200,000. What is the project's NPV?

Question 18 options:

$190,476

$358,708

$168,232

$193,204

SaveQuestion 19

Under the present value concept, a lottery winner would rather receive:

Question 19 options:

$10,000 per year for the next 5 years than receive $50,000 today.

$10,000 per year for the next 5 years than receive $40,000 today.

None of these, as the best answer depends on the interest rate that the lottery winner faces.

$10,000 per year for the next 5 years than receive $30,000 today.

SaveQuestion 20

Which of the following criteria is NOT taken into consideration when analyzing a possible replacement project?

Question 20 options:

The cashflows the current project has generated in the past.

The depreciation associated with the old and potential replacement investment.

The discounted cash flows from the old and potential replacement investment.

The sunk cost associated with the original project.