1. The cost of capital is:
A) the return on the overall market.
B) another term for the risk-free rate of return.
C) the minimum required return on a new investment.
D) another term for the market risk premium.
2. Utah Co. has a beat of 1.4. If the risk free rate is 2% and the market return is 10%, what is Utah Co’s cost of equity assume CAPM?
A) 13.2%
B) 15.6%
C) 16.0%
D) 14.5%
3. Which one of the following will decrease the after-tax cost of debt for a firm?
A) an increase in tax rates
B) an increase in the risk level of the firm
C) an increase in the risk-free rate of return
D) changing the firm's bond rating from A to B
4. Unsystematic risk:
I. is also called unique risk.
II. is also called firm-specific risk.
III. affects a limited number of assets.
IV. affects a large number of assets.
A) I, II, and III only
B) I and III only
C) II and IV only
D) I and IV only
5. The beta of the market is
A) -1
B) 0.5
C) 1
D) 0
6. Maine Company is financed by $4 million in debt, $2 million in preferred stocks, and $6 million in common stocks. The pre-tax cost of debt is 6%, the cost of preferred stock is 8%, and the cost of equity is 12%. Calculate the weighted average cost of capital. Assume 30% tax rate.
A)9.60%
B) 8.73%
C) 7.26%
D) 6.29%