Question Details

 cost of capital




1.	Which of these statements are pertinent to cost of capital?
1.	It is the return that investors demand for a given level of risk.
2.	It may be employed as a benchmark for the evaluation of performance.
3.	For investments decisions, it must be based on the current or prospective cost of the various capital components rather on their historical costs.
4.	It may also be used in acquisition analysis, liquidation studies and source of financing decisions.
5.	It may differ from the hurdle rate used to reflect the alternative risk attributed to a specific project, decision, or business unit.

a.	All five statements.				c. Statements 1,2,3 and 4 only.
b.	Statements 1,2 and 3 only.			d. Statements 1,2,4 and 5 only.	

2.	EF Company has made the decision it finance nest year- capital projects through debt rather than additional equity. The benchmark cost of capital for these projects should be.
a.	The before-tax costs of new-debt financing.
b.	The after-tax costs of new-debt financing.
c.	The cost of equity financing.
d.	The weighted-average cost of capital.

3.	The minimum return that a project must earn for a company in order to leave the value of the company unchanged is the.
 
a.	Current borrowing rate.		
b.	Capitalization rate.
c.	Discount rate.			
d.	Cost of capital.
 

4.	A firm must select from among several methods of financing arrangements when meeting its capital requirements. To acquire additional growth capital while attempting to maximize earnings per share, a firm should normally.
a.	Attempt to increase both debt and equity in equal proportions, which preserves a stable capital structure and maintains investors confidence.
b.	Select debt over equity initially, even through increased debt is accompanied by interest cost and a degree of risk.
c.	Select equity over debt initially, which minimizes risk and avoids the interest costs.
d.	Discontinue dividends and use current cash flow, which avoids the cost and risk of increased debt and the dilution of EPS through increased equity.    

5.	A firm- capital structure 
 
a.	Minimizes the firm- tax liability.
b.	Minimizes firm- risk.
c.	Maximizes the firm- degree of financial leverage.
d.	Maximizes the price of the firm- stock.
 





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