Cost of Capital MCQs

How do we evaluate the committed dividend on preference shares that needs to be furnished by the company?

• By calculating the value of Kp which is possible through division of the selling price for each preference share. Here, the constant dividend per share acts as the divisor.

• Dividing the price for each preference share and then calculating the risk premium.

• Evaluating the value of Kp and then adding the economic growth rate.

• None of these

Why do we always see that the price of share capital in equity is always more than the overall debt amount?

• This is because equity stakes are not readily sellable in the open market.

• Equity shares are not meant for providing a constant dividend rate.

• Debts are relatively safer than equity stakes.

• There is a generalized opinion that equity offers lower face value compared to that debenture on the majority of occasions.

What is meant by the cost of capital of a company?

• It is the equity shares of the company that will provide variable rates of dividend over a set period.

• It is a metric that is inversely proportional to the overall pile of debts.

• It is the return on investment recorded against each fixed asset owned by the company.

• Cost of capital of a company is a stat that represents the internal return rates.

Choose the factor(s) that can be internally controlled by a company to govern the cost of capital incurred over its assets.

• Capital structure targets

• Periodic debt service charges

• Policies designed specifically for investors

• None of the above options.

Can you point out the statistic that is needless while calculating the price of cashable preference shares?

• Costs incurred by the firm while issuing new stocks, also referred to as the floatation costs.

• EPS or earnings generated in the form of profit dividend per share.

• Cost deduction or discount

• Past risk premium amount.

How to describe marginal cost?

• Marginal cost can be described as the extra cost incurred due to the upbringing of an additional capital unit.

• Marginal cost is the extra capital re-allocations that are sanctioned by the firm for securing funds for successful operations.

• Weighted average cost that is intended to improve the financial stability of a brand.

• All of the above.

Please identify which of the below-mentioned premium(s) is/are responsible for the gap between the present yield or output of treasury bonds & the estimated ROI on common stock.

• Expected premium – of the subtracted value obtained through dividend ratio and the difference cited in the long-run growth rate that is assessed for growth portfolios.

• Past risk premium – it is obtained by subtracting an investor’s return estimates upon an equity investment from the risk-free return rates.

• Current risk premium

• Both options (B) and (C).

When we hear the term ‘cost of capital’ we reflect this opinion – “Minimum forecasted return on investment that has to be earned”. Choose the correct option that justifies this statement.

• The statement is false.

• It is applicable in some exceptional cases.

• It is a universally accepted truth in the field of accountancy.

• The statement does not make any sense to the readers.

Which of the following statements is not applicable in relation to ‘cost of capital’?

• Rates of interest are determined successfully when we know the ‘cost of capital.

• Cost of capital forecasts the dividend rates of each investor.

• Cut-off rates can be chalked out by the top-level managers.

• Cost of capital is helpful to some extent in extending the money lending permissions that are required to own capital.

In regards to the cost of capital, please figure out the incorrect proposition from the list given below.

• The retained profit margin does not include any of the company’s expenditures.

• Composite cost is defined as the additional value obtained by summing the price of equity and overall debts.

• As per traditional accounting theory, the cost of capital always gets related to the debt-equity mix.

• none.