Corporate Finance Homework 12

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Corporate Finance Quizzes & Trivia
These are the homework questions for Chapter 12 in Corporate Finance.

  
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Questions and Answers

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  • 1. 
    Katie owns 100 shares of ABC stock. Which one of the following terms is used to refer to the return that Katie and the other shareholders require on their investment in ABC?
    • A. 

      Weighted average cost of capital

    • B. 

      Pure play cost

    • C. 

      Cost of equity

    • D. 

      Subjective cost

    • E. 

      Cost of debt


  • 2. 
    Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the:
    • A. 

      Pure play cost.

    • B. 

      Cost of debt.

    • C. 

      Weighted average cost of capital.

    • D. 

      Subjective cost.

    • E. 

      Cost of equity.


  • 3. 
    The weighted average cost of capital is defined as the weighted average of a firm's:
    • A. 

      Return on its investments.

    • B. 

      Cost of equity and its aftertax cost of debt.

    • C. 

      Pretax cost of debt and equity securities.

    • D. 

      Bond coupon rates.

    • E. 

      Dividend and capital gains yields.


  • 4. 
    In an efficient market, the cost of equity for a risky firm does which one of the following according to the security market line?
    • A. 

      Produces a return that will be less than the market rate but higher than the risk-free rate

    • B. 

      Equals the market rate of return for all stocks

    • C. 

      Has a maximum cost equal to the market rate of return

    • D. 

      Decreases as the beta of the firm's stock increases

    • E. 

      Increases in direct relation to the stock's systematic risk


  • 5. 
    Which one of the following is the pre-tax cost of debt?
    • A. 

      Average coupon rate on the firm's outstanding bonds

    • B. 

      Coupon rate on the firm's latest bond issue

    • C. 

      Weighted average yield-to-maturity on the firm's outstanding debt

    • D. 

      Average current yield on the firm's outstanding debt

    • E. 

      Annual interest divided by the market price per bond for the latest bond issue


  • 6. 
    The cost of preferred stock:
    • A. 

      Increases when a firm's tax rate decreases.

    • B. 

      Is constant over time.

    • C. 

      Is unaffected by changes in the market price.

    • D. 

      Is equal to the stock's dividend yield.

    • E. 

      Increases as the price of the stock decreases.


  • 7. 
    Which one of the following represents the rate of return a firm must earn on its assets if it is to maintain the current value of its securities?
    • A. 

      Cost of equity

    • B. 

      Internal rate of return

    • C. 

      Aftertax cost of debt

    • D. 

      Weighted average cost of capital

    • E. 

      Debt-equity ratio


  • 8. 
    Which one of the following is the primary determinant of an investment's cost of capital?
    • A. 

      Life of investment

    • B. 

      Initial cash outlay

    • C. 

      Level of risk

    • D. 

      Source of funds used for the investment

    • E. 

      Investment's net present value


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