Multiple choice

1.  The company cost of capital is the appropriate discount rate for a firm's:  

a. Low risk projects 

b. High risk projects 

c. Average-risk projects 

d. All of the above 

2.  Cost of capital is the same as cost of equity for firms:  

a. Financed entirely by debt 

b. Financed by both debt and equity 

c. Financed entirely by equity 

d. None of the above 

3.  The cost of capital for a project depends on:  

a. The company's cost of capital 

b. The use to which the capital is put, i.e. the project 

c. The industry cost of capital 

d. All of the above 

4.  Using the company cost of capital to evaluate a project is: I) Always correct II) Always incorrect III) Correct for projects that are about as risky as the average of the firm's other assets  

a. I only 

b. II only 

c. III only 

d. I and III only 

5.  If a firm uses the same company cost of capital for evaluating all projects, which of the following is likely? I) Rejecting good low risk projects II) Accepting poor high risk projects III) Correctly accept projects with average risk  

a. I only 

b. I and II only 

c. I, II, and III 

d. II only 

6.  If firms use the company cost of capital for evaluating all of their projects, which of the following is likely? I) Accepting poor low risk projects II) Rejecting good high risk projects III) Correctly accept projects with average risk  

a. I only 

b. II only 

c. III only 

d. I, II and III 

7.  Which of the following types of projects have the highest risk?  

a. Speculation ventures 

b. New products 

c. Expansion of existing business 

d. Cost improvement, (known technology) 

8.  A firm might categorize its projects into: I) Cost improvement projects II) Expansion projects (existing business) III) New products projects IV) Speculative ventures  

a. III only 

b. I, II and III only 

c. II and IV only 

d. I, II, III, and IV 

9.  Which of the following type of projects has the lowest risk?  

a. Speculation ventures 

b. New products 

c. Expansion of existing business 

d. Cost improvement 

10. Given the following data for the a stock: risk-free rate = 5%; beta (market) = 1.4; beta (size) = 0.4; beta (book-to-market) = -1.1; market risk premium = 7%; size risk premium = 3.7%; and book-to-market risk premium = 5.2%. Calculate the expected return on the stock using the Fama-French three-factor model.  

a. 22.3% 

b. 7.8% 

c. 10.6% 

d. None of the above