Deck 17: The Corporate Form and the Cost of Capital

Question 1

Bonds generally

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

Answer 1

have less risk than stock.

Question 2

Dividends

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.

Answer 2

are not tax deductible.

Question 3

Market prices contain

A)some information.
B)all information.
C)only past information.
D)a bias for old stocks.

Answer 3

all information.

Question 4

The supply of stock

A)comes from new issues.
B)comes from current shareholders.
C)comes from new shares and current stockholders.
D)comes from new shares, current stockholders, and the Federal Reserve.

Question 5

The rate of interest paid on a bond is called the

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

Question 6

Which index is made up of mainly tech and internet stocks?

A)NYSE.
B)Nasdaq.
C)S&P 500.
D)The Dow Jones.

Question 7

Common stockholders

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 8

Stocks are a

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

Question 9

Beta is

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.

Question 10

Stock is

A)bought in a secondary market and sold in a primary market.
B)bought in a secondary market and sold back to the firm.
C)initially purchased in a primary market and sold in a secondary market.
D)none of these choices.

Question 11

Bonds are

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

Question 12

Capital markets

A)create the price of capital.
B)determine the value of capital.
C)direct capital resources to their highest valued use.
D)all of these choices.

Question 13

Capital structure refers to

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 14

A device used to measure the movement of stock prices is called a(n)

A)exchange
B)index.
C)network.
D)bureaucracy.

Question 15

The Capital Asset Pricing Model.

A)is a way to formulate the cost of capital.
B)is a way to calculate the weighted cost of capital.
C)is a usual model for stock market investing.
D)none of these choices

Question 16

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

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

Question 17

The cost of capital is determined by

A)bankers.
B)the capital market.
C)the federal budget deficit.
D)the foreign exchange market.

Question 18

The cost of capital to a firm is equal to

A)a risk-free rate plus an equity premium.
B)a risk-free interest rate.
C)an equity premium charged by lenders.
D)the Treasury bill rate minus an equity premium.

Question 19

The optimum capital structure

A)minimizes the cost of capital only.
B)minimizes the stock price only.
C)minimizes stock price will maximizing the cost of capital.
D)minimizes the costs of capital while maximizing the stock price.

Question 20

The price of a bond and the interest rate

A)are positively related.
B)are inversely related
C)are directly related.
D)are linked by the capital asset pricing model.

Question 21

Beta measures the relative risk of a company's stock relative to overall risk in the stock market.

Question 22

The CAPM does not consider risk-free investments.

Question 23

Stockholders manage risk by

A)electing the board of directors.
B)appointing day-to-day managers.
C)diversifying their portfolios.
D)having lots of bonds in their portfolios.

Question 24

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

Question 25

Bond prices are determined mainly by the demand for bonds.

Question 26

Bondholders and stockholders

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

Question 27

Bond covenants are used to address the riskiness of bonds.

Question 28

If the discount rate increases

A)NPV does not change.
B)NPV rises.
C)NPV falls.
D)investment also increases.

Question 29

Stocks are a form of debt obligation.

Question 30

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

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

Question 31

The NPV of a project rises as the discount rate rises.

Question 32

Bonds are a form of debt.

Question 33

Capital can be treated as a free resource.

Question 34

NPV calculation need to include

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 35

Beta measure overall risk in the stock market.

Question 36

You should invest if a new project if

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.

Question 37

A risk-free rate can be measured by

A)the rate of inflation.
B)the rate on corporate bonds.
C)the Federal Reserve's discount rate.
D)a rate of a Treasury security.

Question 38

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

Question 39

For diversification to be a successful management strategy, it must

A)generate accounting profits.
B)earn normal profits.
C)protect market share.
D)add value.

Question 40

Bond prices and interest rates are inversely related.

Question 41

Bondholders are not indifferent when a company sells more bonds.