Question 1

The after-tax cost of debt is found by:
A)dividing the before-tax cost of debt by (1 - the corporate tax rate).
B)subtracting (1 - the corporate tax rate)from the before-tax cost of debt.
C)multiplying the before-tax cost of debt by (1 - the corporate tax rate).
D)subtracting the corporate tax rate from the before-tax cost of debt.

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), which accounts for the tax deductibility of interest expenses.

Question 2

Which of the following is NOT a contributing factor to the segmentation of capital markets?
A)lack of transparency
B)asymmetric availability of information
C)insider trading
D)All of the above are contributing factors.

Accepted Answer

All of the options listed are contributing factors to the segmentation of capital markets.

Question 3

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.
A)liquid; segmented
B)liquid; large
C)illiquid; segmented
D)large; illiquid

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 or selling without affecting the asset's price, and segmented markets are not fully accessible or integrated with the global market, limiting a firm's capital resources and potentially increasing costs.

Question 4

________ 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.
A)Systematic
B)Unsystematic
C)Total
D)Diversifiable

Accepted Answer

The given definition describes systematic risk, as it is dependent on the market index and the correlation between the firm's expected returns and the market. Systematic risk cannot be diversified away, unlike unsystematic risk (which is specific to individual companies and can be reduced through diversification). Therefore, A is the correct choice. Total risk is the sum of systematic and unsystematic risks, and diversifiable risk is another term for unsystematic risk.

Question 5

If a company fails to accurately predict it's cost of equity, then:
A)the firm's wacc will also be inaccurate.
B)the firm may not be using the proper interest rate to estimate NPV.
C)the firm may incorrectly accept or reject projects based on decisions made using the cost of capital computed with an incorrect cost of equity.
D)All of the above are true.

Accepted Answer

If a company fails to accurately predict its cost of equity, it will impact the calculation of the company's weighted average cost of capital (WACC). This means that the WACC will also be inaccurate (Option A). Since the cost of equity is used in estimating the required rate of return for equity investors, an incorrect cost of equity can impact the calculation of net present value (NPV). If the company is not using the proper interest rate to estimate NPV, it can lead to incorrect decisions regarding project acceptance or rejection (Option B). Therefore, all these options are true (Option D).

Question 6

In general the geometric mean will be ________ the arithmetic mean for a series of returns.
A)less than
B)greater than
C)equal to
D)greater than or equal to

Accepted Answer

The geometric mean will typically be lower than the arithmetic mean for a series of returns because it is a more conservative measure that takes compounding into account.

Question 7

Reasons that firms may find themselves with relatively high costs of capital include:
A)The firms reside in emerging countries with undeveloped capital markets.
B)The firms are too small to easily gain access to their own national securities market.
C)The firms are family owned and they choose not to access public markets and lose control of the firm.
D)all of the above

Accepted Answer

All of the choices listed can contribute to a firm having relatively high costs of capital. Emerging countries with undeveloped capital markets may have less efficient pricing mechanisms and less liquidity, resulting in higher costs of capital. Small firms may have difficulty accessing capital markets and may need to pay higher interest rates or equity dilution costs due to their size. Family-owned firms may choose to maintain control and not access public markets, resulting in a smaller pool of potential investors and higher costs of capital for those that do invest.

Question 8

Which of the following is NOT a key variable in the equation for the capital asset pricing model?
A)the risk-free rate of interest
B)the expected rate of return on the market portfolio
C)the marginal tax rate
D)All are important components of the CAPM.

Accepted Answer

The marginal tax rate is not a key variable in the equation for the capital asset pricing model. The CAPM equation only includes variables related to expected returns and risk, such as the risk-free rate of interest and the expected rate of return on the market portfolio.

Question 9

The capital asset pricing model (CAPM)is an approach:
A)to determine the price of equity capital.
B)used by marketers to determine the price of saleable product.
C)that can be applied only to domestic markets.
D)none of the above

Accepted Answer

The capital asset pricing model (CAPM) is a financial model used to determine the expected return on an investment. It helps in determining the price of equity capital by taking into account the risk-free rate, market risk premium, and the beta of the particular security. Hence, option A is the correct choice. Option B is incorrect because the CAPM model is used to estimate the expected return on equity investment and not for pricing saleable products. Option C is also incorrect because the CAPM model can be applied to both domestic and international markets.

Question 10

Which of the following is generally unnecessary in measuring the cost of debt?
A)a forecast of future interest rates
B)the proportions of the various classes of debt a firm proposes to use
C)the corporate income tax rate
D)All of the above are necessary for measuring the cost of debt.

Accepted Answer

The answer of Which of the following is generally unnecessary...

Question 11

The weighted average cost of capital (WACC)is:
A)the required rate of return for all of a firm's capital investment projects.
B)the required rate of return for a firm's average risk projects.
C)not applicable for use by MNE.
D)equal to 13%.

Accepted Answer

The weighted average cost of capital (WACC) is the required rate of return for a firm's average risk projects. It takes into account the cost of both debt and equity, and provides a measurement for the minimum return that a company must earn on its investments to satisfy its investors. A and C are not correct because WACC does not apply to all capital investment projects, and it is applicable for use by MNEs. D is also not correct because the WACC varies depending on the company and its specific capital structure.

Question 12

Which of the following statements is NOT true regarding beta?
A)Beta will have a value of less than 1.0 if the firm's returns are less volatile than the market.
B)Beta will have a value of greater than 1.0 if the firm's returns are more volatile than the market.
C)Beta will have a value of equal to 1.0 if the firm's returns are of equal volatility to the market.
D)All of the statements above are true.

Accepted Answer

All three statements are true. Beta measures the volatility of a stock or portfolio in relation to the overall market. A beta of less than 1.0 indicates that the stock or portfolio is less volatile than the market, while a beta greater than 1.0 indicates higher volatility. A beta of 1.0 means that the stock or portfolio is just as volatile as the overall market.

Question 13

The beginning share price for a security over a three-year period was $50. Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock was:
A)9.30% and 8.58% respectively.
B)9.30% and 7.89% respectively.
C)9.30% and 7.03% respectively.
D)9.30% and 6.37% respectively.

Accepted Answer

The arithmetic average annual rate of return can be calculated as:
(62-50)/50 + (58-62)/62 + (64-58)/58 / 3 = 0.093 or 9.30%
The geometric average annual rate of return can be calculated as:
[(62/50) x (58/62) x (64/58)]^(1/3) - 1 = 0.086 or 8.58%
Therefore, the correct answer is A.

Question 14

The difference between the expected (or required)return for the market portfolio and the risk-free rate of return is referred to as:
A)beta.
B)the geometric mean.
C)the market risk premium.
D)the arithmetic mean.

Accepted Answer

The difference between the expected return for the market portfolio and the risk-free rate of return is called the market risk premium. This represents the additional return that investors expect to receive for taking on the risk of investing in the market portfolio rather than the risk-free alternative.

Question 15

A firm whose equity has a beta of 1.0:
A)has greater systematic risk than the market portfolio.
B)stands little chance of surviving in the international financial market place.
C)has less systematic risk than the market portfolio.
D)None of the above is true.

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.

Question 16

Relatively high costs of capital are more likely to occur in:
A)highly illiquid domestic securities markets.
B)highly liquid domestic securities markets.
C)unsegmented domestic securities markets.
D)none of the above

Accepted Answer

Highly illiquid domestic securities markets typically have fewer buyers and sellers, resulting in a higher cost for capital. In contrast, highly liquid domestic securities markets have more buyers and sellers, which tends to lower costs of capital. Unsegmented domestic securities markets refer to markets where there are no restrictions on buying or selling securities across regions or countries, and this is not directly related to the cost of capital.

Question 17

Which of the following will NOT affect a firm's beta?
A)the choice of the market portfolio against which to compare the variability of a firm's returns
B)the choice of the risk-free security
C)the choice of the time period used to calculate the firm's beta
D)None of the above, because each of them affects the calculation of a firm's beta.

Accepted Answer

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

Question 18

Which of the following is NOT a contributing factor to the segmentation of capital markets?
A)excessive regulatory control
B)perceived political risk
C)anticipated foreign exchange risk
D)All of the above are contributing factors.

Accepted Answer

All of the options listed (excessive regulatory control, perceived political risk, and anticipated foreign exchange risk) are contributing factors to the segmentation of capital markets.

Question 19

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:
A)relatively low cost of capital.
B)relatively high cost of capital.
C)relatively average cost of capital.
D)cost of capital that we cannot estimate from this question.

Accepted Answer

When a firm has to obtain its long-term debt and equity in a highly illiquid domestic securities market, it will face higher costs associated with transaction and information asymmetry. These costs are likely to increase the overall cost of capital for the firm, making option B the best choice.

Question 20

Systematic risk:
A)is the standard deviation of a security's return.
B)is measured with beta.
C)is measured with standard deviation.
D)none of the above

Accepted Answer

Systematic risk is the portion of total risk that is influenced by factors that affect the overall market or economy. It is commonly measured with beta, which indicates how much a security's return moves in response to changes in the market. Therefore, choice B is the correct option.

Quiz 13: The Global Cost and Availability of Capital

The after-tax cost of debt is found by:

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

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.

________ 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.

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

In general the geometric mean will be ________ the arithmetic mean for a series of returns.

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

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

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

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

The weighted average cost of capital (WACC) is:

Which of the following statements is NOT true regarding beta?

The beginning share price for a security over a three-year period was $50. Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock was:

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:

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

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

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

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:

Systematic risk: