Cost of Capital Quiz

What does a firm's cost of capital represent?

• The total revenue generated by the firm

• The rate that must be earned to satisfy investors

• The amount of debt a firm can take on

• The market value of the firm's assets

Which of the following is NOT included in the calculation of cost of capital?

• Cost of debt

• Accounts payable

• Cost of preference shares

• Cost of equity

How is the after-tax cost of debt calculated?

• Loan interest rate x (1 - Corporate tax rate)

• Bond yield x (1 + Corporate tax rate)

• Loan interest rate + Corporate tax rate

• Bond yield - Corporate tax rate

What is the formula for calculating the cost of preference shares?

• rp = Dp - Pp

• rp = Dp + Pp

• rp = Pp / Dp

• rp = Dp / Pp

Which model is used to calculate the cost of equity based on dividends?

• Dividend Valuation Model (DVM)

• Capital Asset Pricing Model (CAPM)

• Weighted Average Cost of Capital (WACC)

• Net Present Value (NPV)

In the Capital Asset Pricing Model (CAPM), what does beta (ß) measure?

• Total risk of an investment

• Systematic risk of an investment

• Market return

• Dividend growth rate

What is the formula for calculating WACC?

• WACC = wd * rd + wp * rp + ws * rs

• WACC = wd + wp + ws

• WACC = (rd + rp + rs) / 3

• WACC = rd + rp + rs

If a company has a WACC of 13.95%, what does this indicate?

• The company is not profitable

• The company is overvalued

• The company must earn at least 13.95% to satisfy investors

• The company has no debt

If a company has a cost of debt of 11% and a tax rate of 35%, what is the after-tax cost of debt?

• 10.00%

• 8.65%

• 7.15%

• 11.00%

What is the primary purpose of calculating the cost of capital?

• To determine the market value of the firm

• To assess the financing of the business and investment appraisal

• To evaluate employee performance

• To calculate the total revenue of the firm