Question : 1

Basic sources (forms) of capital include which of the following?

	Student Answer:	Both (a) and (b)
		Debt
		Convertible bonds
		Equity
		Leases

Question 2.

Question :

The cost of debt capital to a business is measured by

		none of the above
		the maturity date
		the amount borrowed
		the interest rate

Question 3.

Question :

Which of the following statements about debt contracts is(are) most correct?

	Student Answer:	Both (a) and (b) are correct.
		Debt contracts have several different names.
		All debt contracts name a trustee.
		Debt contracts typically contain restrictive covenants.
		Answers (a), (b), and (c) all are correct.

Question 4.

Question :

Which of the following statements about debt ratings is most correct?

	Student Answer:	The ratings are based solely on a quantitative analysis of the issuer's financial condition.
		The ratings reflect the probability of default.
		The ratings on outstanding debt are automatically reviewed and updated annually.
		The ratings are important to investors but unimportant to issuers.
		The ratings run from A (for the best) to F (for the worst).

Question 6.

Question :

Which of the following statements about term structure is(are) most correct?

	Student Answer:	The yield curve can have a variety of shapes, but the most common is upward sloping.
		Term structure can be expressed either in tabular form or in graphical form.
		Term structure is the relationship between interest rates and debt maturities.
		All of the above statements are correct.
		A term structure graph is called the yield curve.

Question 11.

Question :

Which of the following statements is most correct?

	Student Answer:	The interest rate on a new issue of callable bonds is likely to be equal to that on a similar new issue of noncallable bonds.
		There is no difference in risk to the investor between similar callable and noncallable bonds.
		Noncallable bonds are riskier to the investor, while callable bonds are riskier to the issuer.
		The interest rate on a new issue of noncallable bonds is likely to exceed that on a similar new issue of callable bonds.
		The interest rate on a new issue of callable bonds is likely to exceed that on a similar new issue of noncallable bonds.

Question 13.

Question :

Assume that an outstanding seven-year bond has $1,000 par value, a coupon rate of 10 percent, and five years remaining to maturity. If the required rate of return on similar bonds of equal risk is 5 percent, the bond will sell at which of the following?

	Student Answer:	At $500 ($100 annual interest payments x 5 years to maturity)
		The bond cannot be sold again because it is already outstanding.
		A discount
		A premium
		At par value

Question 18.

Question :

Which of the following statements about efficient markets is(are) most correct?

	Student Answer:	In the long run, investors should expect to earn only a return commensurate with the risk assumed.
		All of the above statements are correct.
		Investors should not expect to "beat the market."
		Not all markets are efficient. For example, the market for real assets is not efficient.
		Current prices reflect all publicly available information.

Question 22.

Question :

Which of the following methods for raising equity capital is not available to not-for-profit corporations?

	Student Answer:	Government grants
		Private contributions
		Retained earnings
		Religious organizations
		Common stock sales

Question 23.

Question :

Investor-owned (for-profit) firms receive the proceeds from stock sales in which of the following markets?

	Student Answer:	IPO market
		Secondary market
		Answers (a) and (b)
		Answers (a), (b), and (c)
		Primary market

Question 24.

Question :

Under the constant growth model of stock valuation, the expected value of a stock (i.e., the expected price at the end of the year) is a function of which of the following?

	Student Answer:	The most recent dividend, the expected dividend growth rate, and the required rate of return on the stock
		The expected dividend growth rate, the required rate of return on the stock, and the expected capital gains yield
		The most recent dividend, the expected dividend growth rate, the required rate of return on the stock, and the expected capital gains yield
		None of the above
		The most recent dividend, the expected dividend growth rate, and the expected capital gains yield

Question 28.

Question :

Which of the following is not a source of equity capital in not-for-profit corporations?

	Student Answer:	Start-up capital from religious, educational, or governmental entities
		Bond issues
		Charitable donations
		Retained earnings
		Government grants

Question 29.

Question :

Which of the following statements about the use of debt financing (financial leverage) is incorrect?

	Student Answer:	Because debt financing "levers up" (increases) owners' returns, its use is called "financial leverage."
		Debt financing allows more of a business's operating income to flow through to investors.
		In most situations, the use of debt financing increases the return to owners (say, as measured by ROE).
		Capital structure theory enables managers to precisely determine the optimal capital structure for any for-profit business.
		In all situations, the use of debt financing increases the riskiness to owners.

Question 30.

Question :

Which of the following statements about the trade-off theory of capital structure is most correct?

	Student Answer:	The trade-off theory tells us that businesses should use some debt financing but not too much.
		The trade-off theory can be used to set a precise optimal structure for any given business.
		The trade-off theory tells us that businesses should use almost 100 percent debt financing.
		The trade-off theory tells us that businesses should use almost no debt financing.
		The trade-off theory has no applicability to not-for-profit businesses.

Question 32.

Question :

Which of the following statements about cost of capital estimation is most correct?

	Student Answer:	Because there is no tax savings associated with debt issued by not-for-profit organizations, it is theoretically wrong to recognize the savings for investor-owned businesses.
		The corporate cost of capital is either the cost of equity or the cost of debt, whichever is greater.
		In general, at least five methods are used to estimate the cost of debt.
		The corporate cost of capital is used as the hurdle (discount) rate for all projects being evaluated in the organization.
		None of the above statements is correct.

Question 33.

Question :

Which of the following statements regarding the cost of equity is(are) most correct?

	Student Answer:	The cost of equity for a not-for-profit hospital is zero.
		The debt cost plus risk premium method is one way to estimate the cost of equity.
		Answers (a), (b), and (c) are correct.
		Answers (a) and (b) are correct.
		The cost of debt is the interest rate set on debt financing, while the cost of equity is defined similarly; it is the rate of return required by equity investors.

Question 37.

Question :

Assume a for-profit skilled nursing facility chain has a target capital structure that is 40 percent debt and 60 percent equity. Assume the chain plans to finance a new project with 50 percent debt and 50 percent equity. The marginal before-tax cost of debt is 8 percent, the tax rate is 35 percent, and the marginal cost of equity is estimated to be 14 percent. What is the organization's corporate cost of capital (rounded to the nearest tenth of a percent)?

	Student Answer:	10.5 percent
		22.0 percent
		9.6 percent
		11.6 percent
		11.0 percent
For question 1 I picked: Debt, 2 the cost of equity, 3 debt contracts have several different names, 4 the ratings are important to investors, unimportant to issuers, 6 a term structure graph is called the yield curve, 11 The interest rate on a new issue of callable bonds is likely to be equal to that on a similar new issue of noncallable bonds, 13 At $500 ($100 annual interest payments x 5 years to maturity), 18 Investors should not expect to "beat the market.", 22 Private contributions, 23 Answers (a), (b), and (c), 24 The most recent dividend, the expected dividend growth rate, the required rate of return on the stock, and the expected capital gains yield, 28 Charitable donations, 29 Debt financing allows more of a business's operating income to flow through to investors. 30 The trade-off theory tells us that businesses should use almost 100 percent debt financing, 32 The corporate cost of capital is used as the hurdle (discount) rate for all projects being evaluated in the organization, 33 The cost of debt is the interest rate set on debt financing, while the cost of equity is defined similarly; it is the rate of return required by equity investors, 37 9.6 percent. All of which I got wrong, despite expert help on here. Please help!