Question 1

You should invest if a new project if

Accepted Answer

A) the NPV is equal to 1. 
B) the NPV is positive. 
C) the NPV is equal to the discount rate. 
D) none of these choices. 
A) the NPV is equal to 1. 
B) the NPV is positive. 
C) the NPV is equal to the discount rate. 
D) none of these choices. B

Question 2

Beta is

Accepted Answer

A) is a measure of the overall market's volatility relative to a specific stock. 
B) is equal to the equity premium. 
C) a measure of a stocks volatility relative to the market as a whole. 
D) none of these choices. 
A) is a measure of the overall market's volatility relative to a specific stock. 
B) is equal to the equity premium. 
C) a measure of a stocks volatility relative to the market as a whole. 
D) none of these choices. C

Question 3

Stocks are a

Accepted Answer

A) form of equity. 
B) form of debt. 
C) form of debt and equity. 
D) just a way for firms to borrow money. 
A) form of equity. 
B) form of debt. 
C) form of debt and equity. 
D) just a way for firms to borrow money. A

Question 4

Bondholders and stockholders

Accepted Answer

A) never in agreement. 
B) are always in agreement. 
C) can disagree at times. 
D) never really interact. 
A) never in agreement. 
B) are always in agreement. 
C) can disagree at times. 
D) never really interact.

Question 5

Bond prices are determined mainly by the demand for bonds.

Accepted Answer

A) True 
 B)False

Question 6

The rate of interest paid on a bond is called the

Accepted Answer

A) coupon rate. 
B) weighted average cost of capital. 
C) discount rate. 
D) all of these choices. 
A) coupon rate. 
B) weighted average cost of capital. 
C) discount rate. 
D) all of these choices.

Question 7

The CAPM does not consider risk-free investments.

Accepted Answer

A) True 
 B)False

Question 8

The corporate form of business allows a more efficient way to manage risk relative to

Accepted Answer

A) proprietorships. 
B) partnerships. 
C) other non-corporate forms of business. 
D) all of these choices. 
A) proprietorships. 
B) partnerships. 
C) other non-corporate forms of business. 
D) all of these choices.

Question 9

Capital structure refers to

Accepted Answer

A) the ratio of equity to debt. 
B) the ratio of common stock to preferred stock. 
C) the ratio of debt to equity. 
D) the ratio of cash to current liabilities 
A) the ratio of equity to debt. 
B) the ratio of common stock to preferred stock. 
C) the ratio of debt to equity. 
D) the ratio of cash to current liabilities

Question 10

Stocks are a form of debt obligation.

Accepted Answer

A) True 
 B)False

Question 11

Bonds are

Accepted Answer

A) equity. 
B) equity and debt. 
C) debt. 
D) paid dividends. 
A) equity. 
B) equity and debt. 
C) debt. 
D) paid dividends.

Question 12

Bond covenants are used to address the riskiness of bonds.

Accepted Answer

A) True 
 B)False

Question 13

The cost of capital is a combination of a firm's payments to the different sources of capital funding is called

Accepted Answer

A) the weighted average cost of capital. 
B) the average cost of capital. 
C) the discount rate. 
D) the transfer price. 
A) the weighted average cost of capital. 
B) the average cost of capital. 
C) the discount rate. 
D) the transfer price.

Question 14

Capital can be treated as a free resource.

Accepted Answer

A) True 
 B)False

Question 15

The Capital Asset Pricing Model determines the weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 16

Dividends

Accepted Answer

A) raise after tax net income. 
B) are not tax deductible. 
C) are tax deductible. 
D) have the same tax treatment for the firm as the tax treatment of interest payments. 
A) raise after tax net income. 
B) are not tax deductible. 
C) are tax deductible. 
D) have the same tax treatment for the firm as the tax treatment of interest payments.

Question 17

Common stockholders

Accepted Answer

A) must be paid a dividend. 
B) interest. 
C) may or may not be paid a dividend. 
D) must buy new shares from the company. 
A) must be paid a dividend. 
B) interest. 
C) may or may not be paid a dividend. 
D) must buy new shares from the company.

Question 18

The cost of capital from different sources is called the weighted average cost of capital.

Accepted Answer

A) True 
 B)False

Question 19

NPV calculation need to include

Accepted Answer

A) only sunk costs of a project. 
B) only variable costs of a project. 
C) all costs related to a project. 
D) a risk-free rate as the discount rate. 
A) only sunk costs of a project. 
B) only variable costs of a project. 
C) all costs related to a project. 
D) a risk-free rate as the discount rate.

Question 20

Bonds generally

Accepted Answer

A) are insured. 
B) have more risk than stock. 
C) have less risk than stock. 
D) have no value on secondary markets. 
A) are insured. 
B) have more risk than stock. 
C) have less risk than stock. 
D) have no value on secondary markets.

Exam 17: The Corporate Form and the Cost of Capital

You should invest if a new project if

Beta is

Stocks are a

Bondholders and stockholders

Bond prices are determined mainly by the demand for bonds.

The rate of interest paid on a bond is called the

The CAPM does not consider risk-free investments.

The corporate form of business allows a more efficient way to manage risk relative to

Capital structure refers to

Stocks are a form of debt obligation.

Bonds are

Bond covenants are used to address the riskiness of bonds.

The cost of capital is a combination of a firm's payments to the different sources of capital funding is called

Capital can be treated as a free resource.

The Capital Asset Pricing Model determines the weighted average cost of capital.

Dividends

Common stockholders

The cost of capital from different sources is called the weighted average cost of capital.

NPV calculation need to include

Bonds generally

Economics and Management

The Power of Markets and the Wealth of Nations

Spontaneous Order, Markets, and Market Failure

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Market Failures and Incentive Issues Inside the Firm

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Strategies With Respect to Government

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