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Questions:

1. A stock's beta

1. reflects only the risk factors specific to the company's industry
2. reflects only the risk factors specific to the company.
3. reflects all risk factors.
4. is not affected by the firm-specific risk factors.

2. Companies with stock shares that present a higher risk to shareholders in their investment portfolio typically offer a _____________ expected return on the stock and have a ___________ weighted average cost of capital.

1. lower, higher
2. higher, lower
3. higher, higher
4. lower, lower

3. Assume a company borrowed $10 million at an 8% annual interest rate. Assuming a 20% tax rate, what is the resulting annual tax saving equal to?

1. $800,000
2. $2,000,000
3. $160,000
4. $640,000

4. A stock's beta equal to 2 would imply that
   1. buying the company's shares is less risky than buying the entire stock market.
   2. the company has less debt in proportion to equity than market average
   3. buying the company's shares is more risky than buying the entire stock market
   4. the company has more debt in proportion to equity than market average
5. What is the best way, in theory, to select projects to be accepted, when a company is faced with a limited budget?
   1. The project with the highest internal rate of return should be selected then the one with the second highest rate of return and so on until all of the funds are exhausted.
   2. A feasible group of the largest number of projects that minimizes the total initial outlay should be selected.
   3. The project with the highest net present worth should be selected then the one with the second highest rate of return and so on until all of the funds are exhausted.
   4. A feasible group of projects with the highest total net present worth possible should be selected.
6. The risk-free rate of return
   1. is higher for the shareholders than for the bondholders.
   2. is equal to zero.
   3. is made up of the time preference rate and the expected inflation rate.
   4. is determined by the central bank.
7. Capital budgeting refers to

1. the company's separate budgets for each individual operating unit
2. the process that the company uses to determine the proportions of debt and equity in its capital structure
3. the company's compliance with the SEC regulations regarding the company's process of projecting revenues and expenses.
4. the process that is used to decide which of the proposed company projects are funded.

8. A project can be rejected due to
   1. its payback period being too low.
   2. lack of funds available.
   3. surplus of funds available.
   4. its internal rate of return being too high.
9. All of the below provide a valid reason for why the cost of debt is lower than the cost of equity, EXCEPT:

1. Using debt leads to a tax saving, while using equity does not
2. There is typically a variety of bonds issued by a corporation with different maturities and features, all resulting in a different interest rate.
3. In the case of bankruptcy, debtholder claims are satisfied prior to those of the shareholders.
4. The cash flows expected by the debtholders are less uncertain than the cash flows expected by the shareholders.

10. Which of the following would increase the weighted average cost of capital?

1. a decrease in the interest rate the company pays on its debt
2. a decrease in the rate of return expected by the shareholders on investment in the company's equity
3. a decrease in the amount of equity, relative to debt used to fund company's projects
4. a decrease in the tax rate the company faces

11. (NOTE: ENTER YOUR ANSWER IN PERCENT, BUT WITHOUT THE % SIGN, rounded to 2 decimal places, for instance as 7.89, not as 7.89%, or not as 0.0789) DO NOT ROUND IN YOUR CALCULATION STEPS (USE CALCULATOR MEMORY FUNCTIONS) Thunder Inc. needs to determine its equity cost. Thunder's stock beta is estimated to be equal to 2. Assuming the market premium equals 9.3%, and a risk-free rate of 1.7%, calculate Thunder's cost of equity.

Answer:

12. (NOTE: ENTER YOUR ANSWER IN PERCENT, BUT WITHOUT THE % SIGN, rounded to 2 decimal places, for instance as 7.89, not as 7.89%, or not as 0.0789) DO NOT ROUND IN YOUR CALCULATION STEPS (USE CALCULATOR MEMORY FUNCTIONS) Calipso Beverages has 200,000 shares of stock outstanding, with one share selling for $290 in the stock market. Calipso's shareholders expect a 17% return on their investment. All of the company's debt comes from a $13 million loan it received 5 years ago. The entire loan is to be repaid with a single $13 million payment 10 years from now. Meanwhile, Calipso is making annual interest payments equal to $400,000. Assuming Calipso faces a 18% tax rate, calculate Calipso's weighted average cost of capital

Answer:

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