Cost of Capital

A firm should use .............. when evaluating an investment

• the least costly source of financing

• the most costly source of financing

• the weighted average cost of all financing sources

• the current opportunity cost

The cost of common stock equity is

• The cost of guarantedd stated dividend expected by the stockholders

• The rate at which investor discount the expected dividends of the firm to determine its share value

• the after tax cost of the interest obligations

• the historical cost of floating the stock issue

The cost of common stock equity may be estimated by using the

• yield curve

• capital asset pricing model

• break even analysis

• Du-pont Analysis

A corporation has concluded that its financial risk premium is too high. In order to decrease this, the firm can

• increase the proportion of long term debt to decrease the cost of capital

• increase the proportion of short term debt to decrease the cost of capital

• decrease the proportion of common stock equity to decrease financial risk

• increase the proportion of common stock equity to decrease financial risk

A firm has a beta of 1.2. The market return equals 14% and the risk free rate of return equals 6%. The estimated cost of common stock equity is

• 6%

• 7.2%

• 14%

• 15.6%

A firm has common stock with a market price of $25 per share and an expected dividend of $2 per share at the end of the coming year. The growth rate in dividends has been 5%. The cost of the firm's commonstock equity is

• 5%

• 8%

• 10%

• 13%

Choose the right statement from the following:

• Cost of debt is always higher than cost of equity

• Cost of debt is always lower than cost of equity

• Cost of debt can be higher or lower than cost of equity

• When company doesn't pay dividend, the cost of equity is zero

The cost of debt can be estimated by

• Calculating Yield to Maturity of the company's obligation

• The interest company needs to pay for its equity

• Using Capital Asset Pricing Model

• Asking the CFO

The Capital Structure of a company means

• the proportion between LT debt and equity

• the proportion between liability and equity

• the proportion between liability and total asset

• the proportion between ST debt + LT debt and equity

What will be the condition that an investment is considered as feasible:

• The Average Annual Investment Return should be higher than the cost of capital

• The cost of capital should be higher than the average annual investment return

• The internal Rate of Return (IRR) should lower than the cost of capital

• The internal Rate of Return is higher than the Net Present Value