#1
Which of the following is NOT a component of cost of capital?
Cost of inventory
ExplanationCost of inventory is not a component; typically includes cost of equity and cost of debt.
#2
What is the formula to calculate Weighted Average Cost of Capital (WACC)?
WACC = (E/V) * Re + (D/V) * Rd * (1 - Tax Rate)
ExplanationWeighted average of the costs of equity and debt capital, adjusted for taxes.
#3
What does the Capital Asset Pricing Model (CAPM) measure?
The required rate of return for an asset
ExplanationCAPM estimates the minimum return an investor expects for bearing a given level of risk.
#4
What is the significance of the Cost of Capital in financial decision-making?
All of the above
ExplanationCost of capital affects capital budgeting, mergers, and acquisitions.
#5
Which of the following factors affect the cost of debt?
All of the above
ExplanationRisk-free rate, default risk, and inflation all influence the cost of debt.
#6
What is the relationship between risk and the cost of capital?
Higher risk leads to a higher cost of capital.
ExplanationInvestors demand higher returns for bearing higher risk.
#7
What is the role of the cost of capital in capital budgeting?
All of the above
ExplanationCost of capital sets the minimum rate of return required for investments.
#8
Which of the following statements is TRUE about the Weighted Average Cost of Capital (WACC)?
WACC remains constant regardless of changes in capital structure.
ExplanationWACC remains constant when the capital structure remains unchanged.
#9
Which of the following is an assumption of the Modigliani-Miller (MM) theorem regarding capital structure?
All of the above
ExplanationMM theorem assumes no taxes, no transaction costs, and perfect information.
#10
How does the cost of equity differ from the cost of debt?
Cost of equity is the return required by shareholders, while the cost of debt is the return required by creditors.
ExplanationEquity represents ownership, while debt represents borrowed funds.
#11
What is the relationship between beta and the cost of equity in the Capital Asset Pricing Model (CAPM)?
Beta is directly proportional to the cost of equity.
ExplanationBeta measures the sensitivity of an asset's returns to market movements.
#12
How does financial leverage affect the Weighted Average Cost of Capital (WACC)?
Increased financial leverage decreases WACC.
ExplanationHigher leverage increases risk but can reduce overall cost of capital.
#13
What role does the risk-free rate play in the Capital Asset Pricing Model (CAPM)?
It represents the rate of return on an investment with zero risk.
ExplanationRisk-free rate provides a baseline return for assessing risk in CAPM.