Optimal Capital Structure
- 1.Which form of invested capital is subject to most of the firm's business and financial risk?
- A.
Debt capital
- B.
Equity capital
- C.
Borrowed capital
- D.
Intellectual capital
- 2.Financial Leverage is best described as
- A.
The ratio of short-term to long-term debt
- B.
A firm's ability to stretch the impact of its capital
- C.
The extent to which a firm chooses to finance its venture of assets by issuing debt securities
- D.
The most aggressive strategy to maximized shareholder's wealth
- E.
None of the above
- 3.Firm specific risk is often referred to as
- A.
Diversifiable risk
- B.
Non-diversifiable risk
- C.
Systematic risk
- D.
Non-systematic risk
- 4.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
- 5.Lester lent money to The Corner 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.
- 6.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.
- 7.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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