Finance Quiz Questions

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Q1- Given that a company's net operating cash flows are $2 million per year in perpetuity and the market value of capital is $10 million, what is the company's cost of capital?

Answer

a. 20%

b. 15%

c. 5%

d. 25%

e. Cannot be determined.

Q2- Calculate the cost of equity capital using CAPM if the risk-free rate of interest is 5 per cent, the return on the market portfolio is 12 per cent and beta of equity is 0.8:

Answer

a. 10.6%

b. 14%

c. 12.2%

d. 12%

e. cannot be determined

Question 4

If a company has on issue debentures paying a coupon rate of 12% p.a. and the market yield on similar securities is 18% pa, what is the correct cost of debt the company should use when estimating the WACC? The riskfree rate is 10% pa.

Answer

a. 10%

b. 12%

c. 18%

d. 15%

e. None of the given options.

Question 5

What is the effective annual interest rate for a bank overdraft with an interest rate of 15% p.a. paid twice a year?

Answer

a. 15%

b. 7.5%

c. 16.4%

d. 15.6%

e. 16.1%

Question 6

Given that preference shares have an expected dividend stream of 20 cents in perpetuity and that the current market price of the preference shares is $2.40, calculate the cost of capital (kp)of these preference shares.

Answer

a. 20%

b. 10%

c. 8%

d. 8.33%

e. 12%

Question 7

From the estimates, calculate the return on equity (after tax) if Rf = 5%, E(Rm) = 13%, beta = 1.5 and the corporate tax rate is 30 per cent.

Answer

a. 21.5%

b. 17%

c. 15%

d. 18.8%

e. 15.05%

Question 8

From the following information, calculate the weighted average cost of debt:

	Market Value	Book Value	Cost of debt
Commercial Bills	$19.5 million	$19 million	6.7%
Bank Overdraft	$5 million	$5 million	15.3%
Bonds	$8.2 million	$5.5 million	9.8%

Answer

	a.	7.2%
	b.	5.6%
	c.	8.74%
	d.	8.79%
	e.	10.6%

Question 9

Calculate the weighted average cost of preference shares and ordinary shares if there are: 1 million preference shares with market value of $2.50 each and an opportunity cost of 10.8%; 10 million ordinary shares with market value of $4.50 each and an opportunity cost of 16.5%.

Answer

	a.	15.4%
	b.	16.9%
	c.	16.2%
	d.	None of the given options.
	e.	Cannot be calculated.

Question 10

Under what conditions can a company's current capital structure be used to calculate the weights for each source of funds?

Answer

	a.	Only when preference shares are not included in the measure for WACC.
	b.	When reliable market weights can be obtained.
	c.	When implementing a new project will alter a company's capital structure.
	d.	When implementing a new project is not expected to alter a company's target capital structure.

Question 11

Under which of the following conditions is it appropriate to estimate a project's cost of capital using the company's cost of capital?

Answer

	a.	When the systematic risk of a project is similar to that of some other divisions.
	b.	When a company operates in a sole industry.
	c.	When a company is a diversified conglomerate.
	d.	When a company operates in more than one industry but less than five.

Question 12

The next dividend for A Limited will be $0.40 per share. Investors require a 16% return on companies such as A Limited. A's dividend increases by 6% every year. Based on the dividend growth model what is the value of A Limited's shares today?

Answer

	a.	$4.00
	b.	$5.05
	c.	$0.40
	d.	cannot be calculated
	e.	$2.50

Question 13

A Limited has just issued a bond with face value of $1000 and a coupon rate of 8%. If the bond has a life of 20 years, pays annual coupons and the YTM is 7.5%, what will the bond sell for?

Answer

	a.	$1051
	b.	$1020
	c.	$1162
	d.	$1087
	e.	$1015

Question 14

The market price of a bond is $1239 (Face Value = 1000). It has 14 years to maturity and pays an annual coupon of $100 in semi-annual installments. What is the effective annual cost of debenture capital before tax (kd)?

Answer

	a.	5.00%
	b.	10.00%
	c.	7.25%
	d.	7.39%
	e.	3.63%

Question 15

Assume that A limited paid a dividend of 20 cents per share just recently. The shares currently sell for $2.60. You also estimate that the dividend will grow steadily at 4% per year into the indefinite future. What is the cost of capital, ke for A limited?

Answer

		10%
		12%
		cannot be calculated
		22%
		2%

Question 16

The cost of capital of a project:

Answer

	a.	Depends on the characteristics of the investors.
	b.	Depends on the business risk of the project.
	c.	Depends on the correlation of the proposed project's cash flows with the cash flows of the firm.
	d.	Depends on the charactistics of the managers of the firm.
	e.	Depends on the characteristics of the company undertaking the project.

Question 17

When is the cost of capital for a company as a whole, a valid measure of the cost of capital for an individual project?

Answer

	a.	When market data are not available.
	b.	When it is not practicable to estimate the cost of capital of individual projects.
	c.	When the risk of the new project is the same as the risk of the firm's existing projects.
	d.	When the CAPM is used as an ex post model.
	e.	Never.

Question 18

XYZ Corporation has just paid a dividend of 50 cents per share. The current market price of the share is $15.60 and shareholders require a return of 10% pa. What is the annual growth rate (g) of the dividends?

Answer

	a.	10.3%
	b.	6.58%
	c.	6.76%
	d.	18.3%
	e.	22.13%
	f.	Cannot be determined from the information provided.
	g.	33%

Question 19

When using the CAPM to estimate the cost of equity for evaluation of investment proposals, the appropriate substitute for the risk free rate of interest is:

Answer

	a.	The yield on a government security whose term to maturity matches the life of the proposed project.
	b.	The yield on 90 day treasury notes.
	c.	The yield on a 30-year government bond.
	d.	The yield on three year government bonds.
	e.	The yield on ten year government bonds. Question 20

Complete the following table by calculating the weighted average cost of capital after tax.

The firm can issue debt to the market at the current rate of 10 % pa. The tax rate is 30 %.

Funds	Cost after Tax %	Value in $M	Weight %	Weighted Cost %
Equity	15%	30
Debt		15
Preference	9%	5
Total

Enter your answers as percentages including the % sign (eg 10%, 3.2%, .9% with no leading zeros, not ~~0.9%~~)