Chapter 15: Required Returns and the Cost of CapitalJust click on the button next to each answer and you'll get immediate feedback.Note: Your browser must support JavaScript in order to use this quiz. Show
1.A single, overall cost of capital is often used to evaluate projects because:it avoids the problem of computing the required rate of return for each investment proposal. 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 acknowledges that most new investment projects offer about the same expected return. 2.The cost of equity capital is all of the following EXCEPT: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. by far the most difficult component cost to estimate. generally lower than the before-tax cost of debt. 3.In calculating the proportional amount of equity financing employed by a firm, we should use:the common stock equity account on the firm's balance sheet. the sum of common stock and preferred stock on the balance sheet. the book value of the firm. the current market price per share of common stock times the number of shares outstanding. 4.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. 5.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?common stock. debt. preferred stock. none of the above. 6.The common stock of a company must provide a higher expected return than the debt of the same company becausethere is less demand for stock than for bonds. there is greater demand for stock than for bonds. there is more systematic risk involved for the common stock. there is a market premium required for bonds. 7.A quick approximation of the typical firm's cost of equity may be calculated byadding a 5 percent risk premium to the firm's before-tax cost of debt. adding a 5 percent risk premium to the firm's after-tax cost of debt. subtracting a 5 percent risk discount from the firm's before-tax cost of debt. subtracting a 5 percent risk discount from the firm's after-tax cost of debt. 8.Market values are often used in computing the weighted average cost of capital becausethis is the simplest way to do the calculation. this is consistent with the goal of maximizing shareholder value. this is required in the U.S. by the Securities and Exchange Commission. this is a very common mistake. 9.For an all-equity financed firm, a project whose expected rate of return plots should be rejected.above the characteristic line above the security market line below the security market line below the characteristic line 10.Some projects that a firm accepts will undoubtedly result in zero or negative returns. In light of this fact, it is best if the firmadjusts its hurdle rate (i.e., cost of capital) upward to compensate for this fact. adjusts its hurdle rate (i.e., cost of capital) downward to compensate for this fact. does not adjust its hurdle rate up or down regardless of this fact. raises its prices to compensate for this fact. 11.The Tchotchke Knick-Knack Company 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 Tchotchke Company's 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. 12.Lei-Feng, Inc.'s $100 par value preferred stock just paid its $10 per share annual dividend. The preferred stock has a current market price of $96 a share. The firm's marginal tax rate (combined federal and state) is 40 percent, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Lei-Feng, Inc. would be closest to .6 percent 6.25 percent 10 percent 10.4 percent 13.David Ding is evaluating two conventional, independent capital budgeting projects (X and Y) by making use of the risk-adjusted discount rate (RADR) method of analysis. Projects X and Y have internal rates of return of 16 percent and 12 percent, respectively. The RADR appropriate to Project X is 18 percent, while Project Y's RADR is only 10 percent. The company's overall, weighted-average cost of capital is 14 percent. David should .accept Project X and accept Project Y. accept Project X and reject Project Y. reject Project X and accept Project Y. reject Project X and reject Project Y. 14. One way to visualize the RADR approach is to make (new) use of an "old friend," the .Security Market Line (SML) characteristic line NPV profile  Multiple-Choice Quiz questions are Copyright © by Pearson Education Limited. Used by permission. All rights reserved.
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When deciding which forecasting model to use, a firm should consider all of the following except
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