#1
What is the primary purpose of calculating the Weighted Average Cost of Capital (WACC)?
To determine the overall cost of the firm's capital
ExplanationWACC helps assess the average cost of a company's capital, considering both equity and debt.
#2
What is the primary objective of cost of capital estimation for a firm?
To maximize shareholder wealth
ExplanationThe primary objective of cost of capital estimation is to maximize shareholder wealth.
#3
What is the formula for calculating the cost of equity?
Risk-free rate + Beta * (Market return - Risk-free rate)
ExplanationCost of equity is determined by the risk-free rate plus beta multiplied by the market risk premium.
#4
Which of the following factors does not affect the cost of debt?
Beta value of the stock
ExplanationThe beta value of the stock does not influence the cost of debt.
#5
What effect does an increase in a company's beta coefficient have on its cost of equity?
Increases the cost of equity
ExplanationA higher beta coefficient leads to an increased cost of equity for the company.
#6
Which of the following is NOT a component of the Capital Asset Pricing Model (CAPM)?
Debt-to-equity ratio
ExplanationThe debt-to-equity ratio is not a component of the CAPM.
#7
What is the relationship between risk and return according to the Capital Asset Pricing Model (CAPM)?
Positive correlation
ExplanationCAPM posits a positive correlation between risk and return.
#8
What does the term 'marginal cost of capital' refer to?
The cost of raising additional capital
ExplanationMarginal cost of capital is the cost incurred to obtain additional capital.
#9
Which of the following is NOT a factor that influences the cost of equity?
Tax rate
ExplanationThe tax rate does not directly influence the cost of equity.
#10
Which of the following statements about the Modigliani-Miller theorem is true?
It argues that the capital structure does not affect the firm's value under certain conditions.
ExplanationModigliani-Miller theorem suggests that, under specific conditions, capital structure doesn't impact firm value.
#11
Which of the following is an implication of a higher Weighted Average Cost of Capital (WACC) for a company?
Decreased valuation
ExplanationA higher WACC is associated with a decreased valuation of the company.
#12
Which of the following is NOT a method of estimating the cost of equity?
Accounting Rate of Return
ExplanationAccounting Rate of Return is not a method for estimating the cost of equity.
#13
What is the relationship between the Weighted Average Cost of Capital (WACC) and the firm's valuation?
As WACC decreases, firm valuation decreases.
ExplanationAs WACC decreases, the valuation of the firm also decreases.
#14
What is the main purpose of the Modigliani-Miller theorem in corporate finance?
To establish conditions under which the capital structure is irrelevant
ExplanationModigliani-Miller theorem aims to show conditions where capital structure does not impact a firm's value.
#15
What is the relationship between the Weighted Average Cost of Capital (WACC) and the firm's capital structure?
WACC decreases as the firm's capital structure becomes more debt-oriented.
ExplanationWACC decreases when the firm's capital structure is more focused on debt.
#16
Which of the following is a limitation of using the Weighted Average Cost of Capital (WACC) for investment appraisal?
It ignores the risk associated with individual projects.
ExplanationWACC ignores the specific risks associated with individual projects.