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Chapter13-Risk,CostofCapital,andCapitalBudgeting

Chapter13Risk,CostofCapital,andCapitalBudgetingAnswerKey

MultipleChoiceQuestions

A.rewardtoriskratioforthefirm.

B.expectedcapitalgainsyieldforthestock.

C.expectedcapitalgainsyieldforthefirm.

D.portfoliobetaforthefirm.

E.weightedaveragecostofcapital(WACC).

Difficultylevel:Easy

Topic:WACC

Type:DEFINITIONS

isequaltothe:

A.returnonthestockminustherisk-freerate.

B.differencebetweenthereturnonthemarketandtherisk-freerate.

C.betatimesthemarketriskpremium.

D.betatimestherisk-freerate.

E.marketrateofreturn.

Difficultylevel:Easy

Topic:CAPM

Type:DEFINITIONS

13-1

Chapter13-Risk,CostofCapital,andCapitalBudgeting

returnsiscalledthe:

A.SecurityMarketLine.

B.CapitalMarketLine.

C.characteristicline.

D.riskline.

E.Noneoftheabove.

Difficultylevel:Medium

Topic:CHARACTERISTICLINE

Type:DEFINITIONS

4.Theuseofdebtiscalled:

A.operatingleverage.

B.productionleverage.

C.financialleverage.

D.totalassetturnoverrisk.

E.businessrisk.

Difficultylevel:Medium

Topic:USEOFDEBT

Type:DEFINITIONS

5.Theweightedaveragecostofcapitalforafirmisthe:

A.discountratewhichthefirmshouldapplytoalloftheprojectsitundertakes.

B.

C.ratethefirmshouldexpecttopayonitsnextbondissue.

D.maximumratewhichthefirmshouldrequireonanyprojectsitundertakes.

E.

Difficultylevel:Medium

Topic:WEIGHTEDAVERAGECOSTOFCAPITAL

Type:DEFINITIONS

13-2

Chapter13-Risk,CostofCapital,andCapitalBudgeting

6.TheWACCisusedto_______theexpectedcashflowswhenthefirmhas____________.

A.discount;debtandequityinthecapitalstructure

B.discount;shorttermfinancingonthebalancesheet

C.increase;debtandequityinthecapi