1) Determine the pure project beta of a project that has 30% debt and 70% equity. The beta for the company is 1.4, and it has a tax rate of 40%. a.1.11 b.1.83 c.1.05 d.1.56 2) In many instances, book value, rather than market value, may be used to determine the weighted average cost of capital. This is because of all of the following EXCEPT __, a.many firms have several different issues of debt which may not be publicly held b.the market prices of the various sources of capital are not easily estimated c.market values change daily d.book value is a more accurate value in determining the actual cost of capital 3) For firms subject to the 40% marginal tax rate, the after-tax cost of __ is roughly three-fifths the cost of preferred stock. a.retained earnings b.new common stock c.long-term debt d.None of these are correct 4) Determine how much you would be willing to pay for a bond that pays $60 annual interest indefinitely and never matures (i.e., a perpetuity), assuming you require an 8 percent rate of return on this investment. a.$480 b.$743 c.$1,000 d.$750 5) If a firm adopts a large proportion of above-average-risk investment projects that are not offset by below-average-risk investment projects, __. a.its cost of capital will fall b.the average risk premium for the firm will decline c.the risk-free rate will increase as more risk is added d.its cost of capital will rise
MCQ'S:
1) Determine the pure project beta of a project that has 30% debt and 70% equity. The beta for the company is 1.4, and it has a tax rate of 40%.
a.1.11
b.1.83
c.1.05
d.1.56
2) In many instances, book value, rather than market value, may be used to determine the weighted average cost of capital. This is because of all of the following EXCEPT __,
a.many firms have several different issues of debt which may not be publicly held
b.the market prices of the various sources of capital are not easily estimated
c.market values change daily
d.book value is a more accurate value in determining the actual cost of capital
3) For firms subject to the 40% marginal tax rate, the after-tax cost of __ is roughly three-fifths the cost of
a.retained earnings
b.new common stock
c.long-term debt
d.None of these are correct
4) Determine how much you would be willing to pay for a bond that pays $60 annual interest indefinitely and never matures (i.e., a perpetuity), assuming you require an 8 percent rate of
a.$480
b.$743
c.$1,000
d.$750
5) If a firm adopts a large proportion of above-average-risk investment projects that are not offset by below-average-risk investment projects, __.
a.its cost of capital will fall
b.the average risk premium for the firm will decline
c.the risk-free rate will increase as more risk is added
d.its cost of capital will rise
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