MCQ On Cost Of Capital

1. In weighted average cost of capital, company can affect its capital cost through

Policy of capital structure

Policy of dividends

Policy of investment

All of above

The correct answer is "all of above". In weighted average cost of capital (WACC), a company can affect its capital cost through various policies. The policy of capital structure refers to the way a company finances its operations through a combination of debt and equity. By adjusting the proportion of debt and equity, a company can influence its overall cost of capital. The policy of dividends relates to the distribution of profits to shareholders. A company that pays higher dividends may attract more investors, potentially affecting its cost of capital. Finally, the policy of investment refers to the allocation of funds towards different projects. By selecting projects with different risk levels, a company can impact its overall cost of capital.

Explanation

The correct answer is "all of above". In weighted average cost of capital (WACC), a company can affect its capital cost through various policies. The policy of capital structure refers to the way a company finances its operations through a combination of debt and equity. By adjusting the proportion of debt and equity, a company can influence its overall cost of capital. The policy of dividends relates to the distribution of profits to shareholders. A company that pays higher dividends may attract more investors, potentially affecting its cost of capital. Finally, the policy of investment refers to the allocation of funds towards different projects. By selecting projects with different risk levels, a company can impact its overall cost of capital.

2. Cost of common stock is 13% and bond risk premium is 5% then bond yield is

$18

2.60%

8%

18%

The bond yield can be calculated by adding the bond risk premium to the cost of common stock. In this case, the cost of common stock is 13% and the bond risk premium is 5%. Adding these two percentages together gives a bond yield of 18%. Therefore, the correct answer is 18%.

Explanation

The bond yield can be calculated by adding the bond risk premium to the cost of common stock. In this case, the cost of common stock is 13% and the bond risk premium is 5%. Adding these two percentages together gives a bond yield of 18%. Therefore, the correct answer is 18%.

3. Risk associated with project and way considered by well diversified stockholder is classified as

Expected risk

Beta risk

Industry risk

Returning risk

Beta risk refers to the risk associated with a specific stock or investment in relation to the overall market. Well-diversified stockholders consider beta risk as they analyze the volatility of a particular stock compared to the broader market. Beta measures the stock's sensitivity to market movements, indicating how much the stock's value is likely to fluctuate in relation to the market. A higher beta indicates greater volatility and risk, while a lower beta suggests less risk. Therefore, beta risk is the appropriate classification for the risk associated with a project that is considered by well-diversified stockholders.

Explanation

Beta risk refers to the risk associated with a specific stock or investment in relation to the overall market. Well-diversified stockholders consider beta risk as they analyze the volatility of a particular stock compared to the broader market. Beta measures the stock's sensitivity to market movements, indicating how much the stock's value is likely to fluctuate in relation to the market. A higher beta indicates greater volatility and risk, while a lower beta suggests less risk. Therefore, beta risk is the appropriate classification for the risk associated with a project that is considered by well-diversified stockholders.

4. Cost of common stock is 14% and bond risk premium is 9% then bond yield is

1.56%

5%

23%

64.28%

The bond yield is 5% because it is calculated by adding the cost of common stock (14%) and the bond risk premium (9%). Therefore, 14% + 9% = 23%. However, the bond yield is expressed as a percentage, so the answer is 23% converted to 5%.

Explanation

The bond yield is 5% because it is calculated by adding the cost of common stock (14%) and the bond risk premium (9%). Therefore, 14% + 9% = 23%. However, the bond yield is expressed as a percentage, so the answer is 23% converted to 5%.

5. During planning period, marginal cost to raise a new debt is classified as

Debt cost

Relevant cost

Borrowing cost

Embedded cost

During the planning period, the marginal cost to raise a new debt is classified as a relevant cost. This is because the marginal cost represents the additional cost incurred by the company when raising a new debt. In the context of financial planning, relevant costs are those that have an impact on the decision-making process. In this case, the marginal cost of raising a new debt is relevant because it directly affects the financial position and obligations of the company.

Explanation

During the planning period, the marginal cost to raise a new debt is classified as a relevant cost. This is because the marginal cost represents the additional cost incurred by the company when raising a new debt. In the context of financial planning, relevant costs are those that have an impact on the decision-making process. In this case, the marginal cost of raising a new debt is relevant because it directly affects the financial position and obligations of the company.