Question 1

Which one of the following components is not used when estimating the cost of risky debt capital?

Accepted Answer

The market risk premium is used when estimating the cost of equity capital, not the cost of debt capital. The real interest rate, inflation premium, default risk premium, and liquidity premium are all factors used in estimating the cost of risky debt capital.

Question 2

The additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value is called?

Accepted Answer

The liquidity premium is the additional premium added to the real interest rate by lenders to compensate them for a debt instrument which cannot be converted to cash quickly at its existing value. The inflation premium is a premium added to the real interest rate to compensate for expected inflation. The default risk premium is the additional premium added to the real interest rate to compensate for the risk of default by the borrower. The maturity premium is the additional premium added to the real interest rate to compensate for the risk associated with longer-term investments. The investment risk premium is the additional premium added to the real interest rate to compensate for the risk associated with a particular investment.

Question 3

Your venture has net income of $600,taxable income of $1,000,operating profit of $1,200,total financial capital including both debt and equity of $9,000,a tax rate of 40%,and a WACC of 10%.What is your venture's EVA?

Accepted Answer

The answer of Your venture has net income of $600,taxable...

Question 4

The added interest rate charged due to the inherent increased risk in long-term debt is called?

Accepted Answer

The added interest rate charged due to the inherent increased risk in long-term debt is called maturity premium. This is because when an investor lends money for a longer period of time, there is a greater chance of inflation, default, or other risks affecting the value of the investment over time. Therefore, investors require a higher return to compensate for this additional risk, which is reflected in the maturity premium.

Question 5

Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the "startup" stage of their life cycles:

Accepted Answer

The answer of Venture investors generally use which one of...

Question 6

The "risk-free" interest rate is the sum of:

Accepted Answer

The risk-free interest rate is the rate of return on an investment that is guaranteed to be paid with zero risk of default. It is composed of two components: the real rate of interest, which is the compensation for forgoing consumption today in favor of consumption in the future, and the inflation premium, which reflects the expected rate of inflation over the life of the investment. Therefore, choice A correctly identifies both components that make up the risk-free interest rate.

Question 7

A venture's "riskiness" in terms of possible poor performance or failure would be considered to be "very high" in which of the following life cycle stages:

Accepted Answer

The startup stage is characterized by a high degree of uncertainty, lack of market knowledge and experience, limited resources, and untested business models. All these factors combined make the startup stage the riskiest of all the life cycle stages. In this stage, the venture has not yet generated any revenue, and its success or failure is uncertain, making it a high-risk stage.

Question 8

Suppose the real risk free rate of interest is 4%,maturity risk premium is 2%,inflation premium is 6%,the default risk on similar debt is 3%,and the liquidity premium is 2%.What is the nominal interest rate on this venture's debt capital?

Accepted Answer

The answer of Suppose the real risk free rate of...

Question 9

Corporate bonds might involve which of the following types of "premiums."

Accepted Answer

All of the above premiums may be involved in corporate bonds.

- Inflation premium: This is the additional yield or compensation an investor demands for the risk of inflation eroding the purchasing power of their principal and interest payments. 
- Default risk premium: This is the additional yield or compensation an investor demands for the risk of the bond issuer defaulting on its payments. 
- Liquidity premium: This is the additional yield or compensation an investor demands for the risk of the bond being less liquid or difficult to sell in the market. 
- Maturity premium: This is the additional yield or compensation an investor demands for the risk of holding a bond until maturity, as market interest rates may change and affect the bond's value.

Question 10

Which of the following venture life cycle stages would involve seasoned financing rather than venture financing?

Accepted Answer

Seasoned financing typically occurs during the maturity stage of a venture's life cycle, where the business has established itself in the market and may require additional funding for expansion or new projects. This stage is less risky than earlier stages, making it more appealing to traditional lenders or investors who are looking for more stable returns on their investment.

Question 11

What has been the approximate average annual rate of return on publicly traded small company stocks since the mid-1920s?

Accepted Answer

According to historical data, the approximate average annual rate of return on publicly traded small company stocks since the mid-1920s has been around 16%. This is based on the performance of the CRSP 6-10 Index, which tracks small company stocks in the US.

Question 12

The cost of equity for a firm is 20%.If the real interest rate is 5%,the inflation premium is 3%,and the market risk premium is 2%,what is the investment risk premium for the firm?

Accepted Answer

The cost of equity (Ke) = real interest rate + inflation premium + market risk premium + investment risk premium
Ke = 5% + 3% + 2% + investment risk premium
20% = 10% + investment risk premium
Therefore, investment risk premium = 20% - 10% = 10%, which is option B.

Question 13

The word "risk" developed from the early Italian word "risicare" and means:

Accepted Answer

The word "risk" developed from the early Italian word "risicare" which means "to dare" or "to take a chance." Therefore, the best choice is C.

Question 14

Use the SML model to calculate the cost of equity for a firm based on the following information: the firm's beta is 1.5; the risk free rate is 5%; the market risk premium is 2%.

Accepted Answer

The answer of Use the SML model to calculate the...

Question 15

Which of the following components is not typically included in the rate on short-term U.S.treasuries?

Accepted Answer

The answer of Which of the following components is not...

Question 16

The difference between average annual returns on common stocks and returns on long-term government bonds is called a:

Accepted Answer

The answer of The difference between average annual returns on...

Question 17

A venture has raised $4,000 of debt and $6,000 of equity to finance its firm.Its cost of borrowing is 6%,its tax rate is 40%,and its cost of equity capital is 8%.What is the venture's weighted average cost of capital?

Accepted Answer

The answer of A venture has raised $4,000 of debt...

Question 18

The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as?

Accepted Answer

The additional interest rate premium required to compensate the lender for the probability that a borrower will not be able to repay interest and principal on a loan is known as the default risk premium. This premium reflects the risk of default associated with a particular investment, and is commonly included in the required rate of return of a bond or loan. Other premiums, such as the inflation premium, liquidity premium, maturity premium, and investment risk premium, are also important considerations for lenders and borrowers, but the default risk premium is specifically related to the risk of non-payment.

Question 19

Venture investors generally use which one of the following target rates to discount the projected cash flows of ventures in the "development" stage of their life cycles:

Accepted Answer