Multiple choice

1. Which of the following type of projects has average risk?  

a. Speculation ventures 

b. New products 

c. Expansion of existing business 

d. Cost improvement 

2. The market value of Charter Cruise Company's equity is $15 million, and the market value of its risk-free debt is $5 million. If the required rate of return on the equity is 20% and that on the debt is 8%, calculate the company's cost of capital. (Assume no taxes.)  

a. 20% 

b. 17% 

c. 14% 

d. None of the above 

3. The market value of Cable Company's equity is $60 million, and the market value of its risk-free debt is $40 million. If the required rate of return on the equity is 15% and that on the debt is 5%, calculate the company's cost of capital. (Assume no taxes.)  

a. 5% 

b. 0% 

c. 1% 

d. One of the above 

4. The company cost of capital when debt as well as equity is used for financing is:  

a. Cost of debt 

b. Cost of equity 

c. The weighted average cost of capital (WACC) 

d. None of the above 

5. The after-tax weighted average cost of capital (WACC) is calculated using the formula:  

a. WACC = (rD) (D/V) + (rE) (E/V) where: V = D + E 

b. WACC = (rD) (1 - TC) (D/V) + (rE) (E/V) where: V = D + E 

c. WACC = (rD) (D/E) + (rE) (E/D) 

d. None of the above 

6. The market value of Charcoal Corporation's common stock is $20 million, and the market value of its risk-free debt is $5 million. The beta of the company's common stock is 1.25, and the market risk premium is 8%. If the Treasury bill rate is 5%, what is the company's cost of capital? (Assume no taxes.)  

a. 5% 

b. 4.6% 

c. 3% 

d. One of the above 

7. The market value of XYZ Corporation's common stock is 40 million and the market value of the risk-free debt is 60 million. The beta of the company's common stock is 0.8, and the expected market risk premium is 10%. If the Treasury bill rate is 6%, what is the firm's cost of capital? (Assume no taxes.)  

a. 9.2% 

b. 14% 

c. 8 1% 

d. None of the above 

8. Cost of equity can be estimated using:  

a. Discounted cash flow (DCF) approach 

b. Capital Asset Pricing Model (CAPM) 

c. Arbitrage Pricing Theory (APT) 

d. All of the above 

9. Cost of equity can be estimated using:  

a. The Fama-French three-factor model 

b. Capital Asset Pricing Model (CAPM) 

c. Arbitrage Pricing Theory (APT) 

d. All of the above 

10. The historical returns data for the past three years for Company A's stock is -6%, 15%, 15% and that of the market portfolio is 10%, 10% and 16%. Calculate the beta for Stock A.  

a. 1.75 

b. 1.0 

c. 0.57 

d. None of the above