WorksheetsQuiz 2: The cost of capital
Total questions: 10
Worksheet time: 10mins
A single, overall cost of capital is often used to evaluate projects because
it is the only way to measure a firm's required return.
it acknowledges that most new investment projects have about the same degree of risk.
it avoids the problem of computing the required rate of return for each investment proposal.
it acknowledges that most new investment projects offer about the same expected return.
The cost of equity capital is all of the following EXCEPT:
generally lower than the before-tax cost of debt.
by far the most difficult component cost to estimate.
the minimum rate that a firm should earn on the equity-financed part of an investment.
a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
In calculating the costs of the individual components of a firm's financing, the corporate tax rate is important to which of the following component cost formulas?
Ordinary Shares
Preferences Shares
Long-term Debt
Short-term Debt
To compute the required rate of return for equity in a company using the CAPM, it is necessary to know all of the following EXCEPT:
The risk-free rate.
The beta for the firm.
The earnings for the next time period.
The market return expected for the time period.
The common stock of a company must provide a higher expected return than the debt of the same company because:
There is a market premium required for bonds.
There is more systematic risk involved for the common stock.
There is greater demand for stock than for bonds.
There is less demand for stock than for bonds.
In calculating the proportional amount of equity financing employed by a firm, we should use:
The current market price per share of common stock times the number of shares outstanding.
The book value of the firm.
The sum of common stock and preferred stock on the balance sheet.
the common stock equity account on the firm's balance sheet.
Love Berhad relies on preferred stock, bonds, and common stock for its long-term financing. Rank in ascending order (i.e., 1 = lowest, while 3 = highest) the likely after-tax component costs of the Love Berhad long-term financing.
1 = bonds; 2 = common stock; 3 = preferred stock.
1 = bonds; 2 = preferred stock; 3 = common stock.
1 = common stock; 2 = preferred stock; 3 = bonds.
1 = preferred stock; 2 = common stock; 3 = bonds.
Which of the following methods involves computing the cost of capital by dividing the dividend by market price/net proceeds per share?
Adjusted price method
Price earning method
Dividend yield method
Adjusted dividend method Adjusted dividend method
Which among the following figures is not relevant while calculating the cost of the redeemable preference shares?
Earning Per Share (EPS)
Discount
Floatation Cost
None of the above
Which of the following factors affecting the cost of capital can be controlled by the firm?
Level of interest rates
Dividend policy
Tax rates
None of the above
