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MCQ on Cost of Capital

1. The bond risk premium is added into bond yield to calculate _______.
(A) Cost of option
(B) Cost of common stock
(C) Cost of preferred stock
(D) Cost of working capital

2. Interest rates, tax rates, and market risk premium Eire factors which –
(A) Industry cannot control
(B) Industry can control
(C) Firm must control
(D) Firm cannot control

3. Cost of capital is equal to the required return rate on equity in case if investors are only ______.
(A) Valuation Manager
(B) Common Stockholders
(C) Asset Seller
(D) Equity Dealer

4. The cost of equity share or debt is called the specific cost of capital. When specific costs are combined, then we arrive at ____.
(A) Maximum rate of return
(B) Internal rate of return
(C) Overall cost of capital
(D) Accounting rate of return

5. If we deduct ‘risk-free return’ from ‘market return’ and multiply it with ‘beta factor’ and again add ‘risk-free return’, the resultant figure will be –
(A) Nil
(B) Risk premium
(C) Cost of equity
(D) WACC of the firm

6. Cost of equity share or debt is called ______.
(A) Related cost of capital
(B) Easy to calculate the cost of capital
(C) Specific cost of capital
(D) Burden on the shareholder

7. ____ is the rate of return associated with the best investment opportunity for the firm and its shareholders that will be forgone if the projects presently under consideration by the firm were accepted.
(A) Explicit Cost
(B) Future Cost
(C) Implicit Cost
(D) Specific Cost

8. For each component of capital, a required rate of return is considered as:
(A) Component cost
(B) Evaluating cost
(C) Asset cost
(D) Asset depreciation value

9. In which of the cost of the following method of equity capital is computed by dividing the dividend by market price per share or net proceeds per share?
(A) Price Earning Method
(B) Adjusted Price Method
(C) Adjusted Dividend Method
(D) Dividend Yield Method

10. In weighted average cost of capital, rising in interest rate leads to –
(A) Increase in cost of debt
(B) Increase the capital structure
(C) Decrease in cost of debt
(D) Decrease the capital structure

11. ____ is the rate that the firm pays to procure financing.
(A) Average Cost of Capital
(B) Combine Cost
(C) Economic Cost
(D) Explicit Cost

12. ____ is the cost that has already been incurred for financing a particular project.
(A) Future Cost
(B) Historical Cost
(C) Implicit Cost
(D) Opportunity Cost

13. In weighted average cost of capital, capital components are funds that are usually offered by:
(A) Stock market
(B) Investors
(C) Capitalist
(D) Exchange index

14. Which of the following model/ method makes use of Beta (β) in the calculation of the cost of equity?
(A) Risk-Adjusted Discount Model
(B) Capital Assets Pricing Method
(C) MM Model
(D) Price Earning Method

15. The preferred dividend is divided by preferred stock price multiply by (1 – floatation cost) is used to calculate –
(A) Transaction cost of preferred stock
(B) Financing of preferred stock
(C) Weighted cost of capital
(D) The Component cost of preferred stock

16. Premium which is considered as the difference of expected return on common stock and the current yield on Treasury bonds is called –
(A) Past risk premium
(B) Expected premium
(C) Current risk premium
(D) Beta premium

17. Marginal cost ____
(A) is the weighted average cost of new finance raised by the company.
(B) is the additional cost of capital when the company goes for further raising of finance.
(C) is the cost of raising an additional rupee of capital.
(D) All of the above

18. Which of the following is a controllable factor affecting the cost of capital of the firm?
(A) Dividend policy
(B) Level of interest rates
(C) Tax rates
(D) All of the above

19. An interest rate that is paid by a firm as soon as it issues debt is classified as pre-tax –
(A) Term structure
(B) Market premium
(C) Risk premium
(D) Cost of debt

20. Which of the following method of cost of equity is similar to the dividend price approach?
(A) Discounted cash flow (DCF) method
(B) Capital asset pricing model
(C) Price earning method
(D) After-tax equity method

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