finance homework mcq eco282

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

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Junjie Liu – Econ 282 Practice Multiple Choice

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

a. Speculation ventures

b. New products

C. Expansion of existing business

d. Cost improvement

11. 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

12. 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

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Junjie Liu – Econ 282 Practice Multiple Choice

13. 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

14. 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

15. 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

16. 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