Weighted Average Cost of Capital (WACC) and Cost of Equity Quiz

Dive into a quiz on WACC & Cost of Equity within Corporate Finance. Test your understanding on calculations, components, and investment impacts.

Practice Learn Test

What does WACC stand for?

Weighted Asset Cost Calculation

Weighted Average Cost of Capital

Weighted Accounting Cost Comparison

Weighted Allocation of Capital Costs

Which of the following components is NOT typically included in the calculation of WACC?

Cost of Equity

Cost of Debt

Cost of Inventory

Weight of Debt

What does the 'E' represent in the WACC formula?

Enterprise value

Equity

Expected return

Earnings

What does the 'D' represent in the WACC formula?

Dilution factor

Depreciation

Dividend yield

Debt

What does the 'Re' represent in the WACC formula?

Revenue

Return on equity

Risk-free rate

Reinvestment rate

How is the cost of equity calculated using the Capital Asset Pricing Model (CAPM)?

Risk-free rate plus beta times market risk premium

Debt-to-equity ratio multiplied by cost of debt

Market risk premium divided by beta

Risk-free rate minus beta times market risk premium

Which factor would typically increase a company's cost of equity?

Decrease in beta

Increase in market risk premium

Decrease in risk-free rate

Decrease in company's debt level

What is the formula for calculating WACC?

WACC = Cost of Equity / Cost of Debt

WACC = Cost of Equity * Cost of Debt

WACC = (E/V * Re) + (D/V * Rd * (1 - Tc))

WACC = (E/V * Re) + (D/V * Rd * Tc)

Which of the following is NOT a method to estimate the cost of equity?

Dividend Discount Model (DDM)

Gordon Growth Model

Bond Yield Plus Risk Premium Approach

Arithmetic Mean Return Approach

#10

Which of the following best describes the concept of 'beta' in the CAPM model?

Measure of a company's financial leverage

Measure of a company's systematic risk

Ratio of debt to equity in a company's capital structure

Expected return on the market portfolio

#11

How does the tax rate affect the cost of debt component of WACC?

Higher tax rates decrease the cost of debt

Higher tax rates increase the cost of debt

Tax rate has no impact on the cost of debt

Tax rate affects the cost of equity, not debt

#12

What is the primary limitation of using WACC for investment decisions?

It does not account for risk

It cannot be calculated accurately

It ignores the cost of debt

It assumes a constant capital structure

#13

Which of the following is an assumption of the Modigliani-Miller theorem regarding WACC?

Taxes have no effect on capital structure

WACC is always equal to the cost of equity

Debt is cheaper than equity financing

WACC decreases as debt increases