Optimal Capital Structure

1. Lester lent money to The Corner Store. The rate of return that he and the other lenders require is referred to as the:

Pure play cost.

Cost of debt.

Weighted average cost of capital.

Subjective cost.

Cost of equity.

2. Financial Leverage is best described as

The ratio of short-term to long-term debt

A firm's ability to stretch the impact of its capital

The extent to which a firm chooses to finance its venture of assets by issuing debt securities

The most aggressive strategy to maximized shareholder's wealth

None of the above

3. 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?

Weighted average cost of capital

Pure play cost

Cost of equity

Subjective cost

Cost of debt

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

Return on its investments.

Cost of equity and its aftertax cost of debt.

Pretax cost of debt and equity securities.

Bond coupon rates.

Dividend and capital gains yields.

5. Which form of invested capital is subject to most of the firm's business and financial risk?

Debt capital

Equity capital

Borrowed capital

Intellectual capital

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

Life of investment

Initial cash outlay

Level of risk

Source of funds used for the investment

Investment's net present value

7. Firm specific risk is often referred to as

Diversifiable risk

Non-diversifiable risk

Systematic risk

Non-systematic risk