Question 1

Which of the following is generally unnecessary in measuring the cost of debt?

Accepted Answer

D

Question 2

The weighted average cost of capital (WACC)is:

Accepted Answer

The weighted average cost of capital (WACC) is the average rate of return that a company expects to pay to all its investors: creditors, shareholders, and other stakeholders. It takes into account the cost of each type of capital, weighted by its proportion in the company's capital structure. The WACC is used as a discount rate to evaluate new investments, which means that it represents the required rate of return for a firm's average risk projects. Option A is not correct because the WACC is not necessarily the required rate of return for all the firm's projects, as some may have higher or lower risks and returns. Option C is also not correct, as the WACC is a widely used financial tool by both domestic and multinational companies. Option D is not accurate, as the WACC can vary depending on the specific capital structure and market conditions of each company.

Question 3

Other things equal,a firm that must obtain its long-term debt and equity in a highly illiquid domestic securities market will probably have a:

Accepted Answer

If a firm has to obtain its long-term debt and equity in a highly illiquid domestic securities market, it will have limited options to raise funds, which increases the risk for investors. As a result, investors will demand a higher rate of return to compensate for the increased risk, leading to a relatively high cost of capital for the firm.

Question 4

Which of the following is NOT a contributing factor to the segmentation of capital markets?

Accepted Answer

All of the given factors contribute to the segmentation of capital markets, meaning none of them are excluded as a choice.

Question 5

If a company fails to accurately predict it's cost of equity,then:

Accepted Answer

All of the options are true. If a company fails to accurately predict its cost of equity, it will ultimately affect the accuracy of the firm's WACC. Further, if the firm uses an incorrect interest rate to estimate NPV, it may end up making incorrect decisions. Moreover, if the firm makes decisions using the cost of capital computed with an incorrect cost of equity, it may wrongly accept or reject projects.

Question 6

Systematic risk:

Accepted Answer

Systematic risk refers to the risk that affects the entire market or a specific industry, rather than just one particular security. It cannot be diversified away by holding a diversified portfolio. Beta is a measure of systematic risk and is used to assess the sensitivity of a security's returns to movements in the overall market. Therefore, choice B, "is measured with beta," is the best answer.

Question 7

Which of the following is NOT a contributing factor to the segmentation of capital markets?

Accepted Answer

All of the listed factors contribute to the segmentation of capital markets.

Question 8

The capital asset pricing model (CAPM)is an approach:

Accepted Answer

The capital asset pricing model (CAPM) is widely used by finance professionals to determine the appropriate required rate of return to use when evaluating potential investments. This required rate of return is a key input in estimating the cost of equity capital, which is an important component of determining the overall cost of capital for a company. The other options - B and C - are not accurate descriptions of what CAPM is used for.

Question 9

The after-tax cost of debt is found by:

Accepted Answer

The after-tax cost of debt is calculated by multiplying the before-tax cost of debt by (1 minus the corporate tax rate). This accounts for the tax shield benefit of debt, as interest payments are deductible expenses that reduce taxable income.

Question 10

Which of the following statements is NOT true regarding beta?

Accepted Answer

All of the statements are true. Beta measures the volatility of a stock in relation to the overall market. A beta of less than 1.0 means that the stock is less volatile than the market, a beta greater than 1.0 means that the stock is more volatile than the market, and a beta of 1.0 means that the stock's volatility is equal to that of the market.

Question 11

If a firm lies within a country with ________ or ________ domestic capital markets,it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets.

Accepted Answer

A firm in a country with illiquid or segmented domestic capital markets can benefit from accessing international capital markets to achieve lower global costs and greater availability of capital. Illiquid markets lack the ease of buying/selling without affecting the asset's price, and segmented markets are not fully open to all investors, limiting capital access and potentially increasing costs.

Question 12

Which of the following is NOT a key variable in the equation for the capital asset pricing model?

Accepted Answer

The marginal tax rate is not a key variable in the equation for the capital asset pricing model. The important variables are the risk-free rate of interest and the expected rate of return on the market portfolio, which are used to calculate the expected rate of return on a specific asset.

Question 13

________ risk is a function of the variability of expected returns of the firm's stock relative to the market index and the measure of correlation between the expected returns of the firm and the market.

Accepted Answer

The description given in the question is the definition of systematic risk. Systematic risk is a type of market risk and is not diversifiable. Unsystematic risk, also known as specific risk or idiosyncratic risk, is related to the specific factors that affect a particular company's stock and can be diversified away through portfolio diversification. Total risk is the combination of systematic and unsystematic risk. Therefore, the best choice based on the given description is option A, systematic risk.

Question 14

Relatively high costs of capital are more likely to occur in:

Accepted Answer

High costs of capital are more likely to occur in highly illiquid domestic securities markets because investors may require a higher return to compensate for the risk of not being able to easily sell their securities. In highly liquid markets, investors may be willing to accept lower returns since they can quickly sell their securities if necessary. Unsegmented domestic securities markets do not necessarily affect the cost of capital.

Question 15

Which of the following will NOT affect a firm's beta?

Accepted Answer

The answer of Which of the following will NOT affect...

Question 16

________ risk is measured with beta.

Accepted Answer

Systematic risk, also known as market risk, represents the risk that is inherent in the entire market or economy, such as changes in interest rates or economic downturns. This type of risk can be measured by beta, which measures the volatility of a stock or portfolio in relation to the overall market. Unsystematic risk, on the other hand, is unique to a specific company or industry and can be diversified away through portfolio diversification.

Question 17

Reasons that firms may find themselves with relatively high costs of capital include:

Accepted Answer

All of the choices can lead to high costs of capital. Emerging countries with undeveloped capital markets may have limited access to financing options, resulting in higher costs of capital. Small firms may struggle to attract investors and may have to pay a premium for funds obtained through loans or equity offerings. Family-owned firms may choose to avoid public markets and retain control of the company, which can limit access to funding sources and lead to higher costs of capital.

Question 18

Beta may be defined as:

Accepted Answer

Beta can be defined as the measure of systematic risk as it measures how much a stock's price moves relative to the overall market. It is also a risk measure of a portfolio as it shows how much the portfolio's value is affected by market movements. Finally, beta is calculated as the ratio of the portfolio's variance to the market's variance, making all the above options correct.

Question 19

The difference between the expected (or required)return for the market portfolio and the risk-free rate of return is referred to as:

Accepted Answer

The difference between the expected return for the market portfolio (which is represented by the market as a whole) and the risk-free rate of return is known as the market risk premium. This premium represents the additional return that an investor expects to receive as a result of taking on market risk. Option A is incorrect because beta is a measure of risk, specifically the sensitivity of an asset's return to changes in the market return. Option B and D are incorrect because they refer to different types of averages, but are not related to the market risk premium.

Question 20

A firm whose equity has a beta of 1.0:

Accepted Answer

A beta of 1.0 indicates that the firm's equity has the same level of systematic risk as the market portfolio, not greater or less. The statement about survival in the international financial market is unrelated to beta.

Quiz 13: The Global Cost and Availability of Capital

Which of the following is generally unnecessary in measuring the cost of debt?

The weighted average cost of capital (WACC) is:

Other things equal,a firm that must obtain its long-term debt and equity in a highly illiquid domestic securities market will probably have a:

Which of the following is NOT a contributing factor to the segmentation of capital markets?

If a company fails to accurately predict it's cost of equity,then:

Systematic risk:

Which of the following is NOT a contributing factor to the segmentation of capital markets?

The capital asset pricing model (CAPM) is an approach:

The after-tax cost of debt is found by:

Which of the following statements is NOT true regarding beta?

If a firm lies within a country with or domestic capital markets,it can achieve lower global cost and greater availability of capital with a properly designed and implemented strategy to participate in international capital markets.

Which of the following is NOT a key variable in the equation for the capital asset pricing model?

________ risk is a function of the variability of expected returns of the firm's stock relative to the market index and the measure of correlation between the expected returns of the firm and the market.

Relatively high costs of capital are more likely to occur in:

Which of the following will NOT affect a firm's beta?

________ risk is measured with beta.

Reasons that firms may find themselves with relatively high costs of capital include:

Beta may be defined as:

The difference between the expected (or required) return for the market portfolio and the risk-free rate of return is referred to as:

A firm whose equity has a beta of 1.0: