FIN 701 Exam 3 Module 5 Study Guide
Exam with Complete Answers 2026-2027
Updated.
D) both the returns currently required by its debtholders and stockholders. - Answer 1) A
company's current cost of capital is based on:
E) A reduction in the risk-free rate - Answer 2) All else constant, which one of the following will
increase a company's cost of equity if the company computes that cost using the security
market line approach? Assume fim currently pays an annual dividend of $1 a share and has a
beta of 1.2
C) is dependent upon a reliable estimate of the market risk premium. - Answer 3) Assume
Russo's has a debt-equity ratio of 4 and uses the capital asset pricing model (CAPM) to
determine its cost of equity. As a result, the company's cost of equity:
B) Cost of equity - Answer 4) A group of individuals got together and purchased all of the
outstanding shares of common stock of DL Smith Inc. What is the return that these individuals
require on this investment called?
C) cost of debt. - Answer 5) Textile Mills borrows money at a rate of 8.7 percent. This interest
rate is referred to as the: A) compound rate B) current yield. C) cost of debt. D) capital gains
yield. E) cost of capital.
B) A decrease in the company's tax rate - Answer 6) Which one of these will increase a
company's aftertax cost of debt? A) A decrease in the company's debt-equity ratio B) A decrease
in the company's tax rate C) An increase in the credit rating of the company's bonds D) An
increase in the company's beta E) A decrease in the market rate of interest
E) cost of an irregular growth common stock - Answer 7) The cost of preferred stock is
computed the same as the A) pretax cost of debt. B) rate of return on an annuity. C) aftertax
cost of debt D) rate of return on a perpetuity. E) cost of an irregular growth common stock
C) is the return investors require on the total assets of the firm. - Answer 8) A company's
weighted average cost of capital: A) is equivalent to the aftertax cost of the outstanding
liabilities. B) should be used as the required return when analyzing any new project. C) is the
return investors require on the total assets of the firm. D) remains constant when the debt-
equity ratio changes. E) is unaffected by changes in corporate tax rates.
E) weighted average cost of capital. - Answer 9) The average of a company's cost of equity,
cost of preferred, and aftertax cost of debt that is weighted based on the company's capital
, structure is called the A) reward-to-risk ratio. B) weighted capital gains rate. C) structured cost
of capital. D) subjective cost of capital. E) weighted average cost of capital.
B) increase the average risk level of the company over time. - Answer 10) If a company uses its
WACC as the discount rate for all of the projects it undertakes then the company will tend to: A)
accept all positive net present value projects. B) increase the average risk level of the company
over time. C) reject all high-risk projects. D) reject all negative net present value projects. E)
favor low-risk projects over high-risk projects
C) assigns discount rates to projects based on the discretion of the senior managers of a firm. -
Answer 11) The subjective approach to project analysis: A) is used only when a firm has an all-
equity capital structure. B) uses the WACC of Firm X as the basis for the discount rate for a
project under consideration by Firm Y C) assigns discount rates to projects based on the
discretion of the senior managers of a firm. D) allows managers to randomly adjust the discount
rate assigned to a project once the project's standard deviation has been determined E) applies
a lower discount rate to projects that are financed totally with equity as compared to those that
are partially financed with debt.
B) pure play - Answer 12) When a manager develops a cost of capital for a specific project
based on the cost of capital for another firm that has a similar line of business as the project,
the manager is utilizing the ______ approach. A) subjective risk B) pure play C) divisional cost of
capital D) capital adjustment E) security market line
D) 7.83 percent - Answer 13) Chelsea Fashions is expected to pay an annual dividend of $1.26
a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent.
What is the cost of equity? A) 9.77 percent B) 7.91 percent C) 9.24 percent D) 7.83 percent E)
7.54 percent
D) 8.27 percent - Answer 14) Sweet Treats common stock is currently priced at $36.72 a share.
The company just paid $2.18 per share as its annual dividend. The dividends have been
increasing by 2.2 percent annually and are expected to continue doing the same. What is the
cost of equity? A) 9.41 percent B) 9.51 percent C) 8.47 percent D) 8.27 percent E) 8.82 percent
A) 1.85 percent - Answer 15) Highway Express has paid annual dividends of $1.32, $1.33,
$1.38, $1.40, and $1.42 over the past five years, respectively. What is the average dividend
growth rate? A) 1.85 percent B) 2.16 percent C) 1.98 percent D) 2.47 percent E) 2.39 percent
C) 10.17 percent - Answer 16) Southern Bakeries just paid its annual dividend of $.48 a share.
The stock has a market price of $17.23 and a beta of .93. The return on the U.S. Treasury bill is
3.1 percent and the market risk premium is 7.6 percent. What is the cost of equity? A) 9.98
percent B) 10.04 percent C) 10.17 percent D) 10.30 percent E) 10.45 percent
Exam with Complete Answers 2026-2027
Updated.
D) both the returns currently required by its debtholders and stockholders. - Answer 1) A
company's current cost of capital is based on:
E) A reduction in the risk-free rate - Answer 2) All else constant, which one of the following will
increase a company's cost of equity if the company computes that cost using the security
market line approach? Assume fim currently pays an annual dividend of $1 a share and has a
beta of 1.2
C) is dependent upon a reliable estimate of the market risk premium. - Answer 3) Assume
Russo's has a debt-equity ratio of 4 and uses the capital asset pricing model (CAPM) to
determine its cost of equity. As a result, the company's cost of equity:
B) Cost of equity - Answer 4) A group of individuals got together and purchased all of the
outstanding shares of common stock of DL Smith Inc. What is the return that these individuals
require on this investment called?
C) cost of debt. - Answer 5) Textile Mills borrows money at a rate of 8.7 percent. This interest
rate is referred to as the: A) compound rate B) current yield. C) cost of debt. D) capital gains
yield. E) cost of capital.
B) A decrease in the company's tax rate - Answer 6) Which one of these will increase a
company's aftertax cost of debt? A) A decrease in the company's debt-equity ratio B) A decrease
in the company's tax rate C) An increase in the credit rating of the company's bonds D) An
increase in the company's beta E) A decrease in the market rate of interest
E) cost of an irregular growth common stock - Answer 7) The cost of preferred stock is
computed the same as the A) pretax cost of debt. B) rate of return on an annuity. C) aftertax
cost of debt D) rate of return on a perpetuity. E) cost of an irregular growth common stock
C) is the return investors require on the total assets of the firm. - Answer 8) A company's
weighted average cost of capital: A) is equivalent to the aftertax cost of the outstanding
liabilities. B) should be used as the required return when analyzing any new project. C) is the
return investors require on the total assets of the firm. D) remains constant when the debt-
equity ratio changes. E) is unaffected by changes in corporate tax rates.
E) weighted average cost of capital. - Answer 9) The average of a company's cost of equity,
cost of preferred, and aftertax cost of debt that is weighted based on the company's capital
, structure is called the A) reward-to-risk ratio. B) weighted capital gains rate. C) structured cost
of capital. D) subjective cost of capital. E) weighted average cost of capital.
B) increase the average risk level of the company over time. - Answer 10) If a company uses its
WACC as the discount rate for all of the projects it undertakes then the company will tend to: A)
accept all positive net present value projects. B) increase the average risk level of the company
over time. C) reject all high-risk projects. D) reject all negative net present value projects. E)
favor low-risk projects over high-risk projects
C) assigns discount rates to projects based on the discretion of the senior managers of a firm. -
Answer 11) The subjective approach to project analysis: A) is used only when a firm has an all-
equity capital structure. B) uses the WACC of Firm X as the basis for the discount rate for a
project under consideration by Firm Y C) assigns discount rates to projects based on the
discretion of the senior managers of a firm. D) allows managers to randomly adjust the discount
rate assigned to a project once the project's standard deviation has been determined E) applies
a lower discount rate to projects that are financed totally with equity as compared to those that
are partially financed with debt.
B) pure play - Answer 12) When a manager develops a cost of capital for a specific project
based on the cost of capital for another firm that has a similar line of business as the project,
the manager is utilizing the ______ approach. A) subjective risk B) pure play C) divisional cost of
capital D) capital adjustment E) security market line
D) 7.83 percent - Answer 13) Chelsea Fashions is expected to pay an annual dividend of $1.26
a share next year. The market price of the stock is $24.09 and the growth rate is 2.6 percent.
What is the cost of equity? A) 9.77 percent B) 7.91 percent C) 9.24 percent D) 7.83 percent E)
7.54 percent
D) 8.27 percent - Answer 14) Sweet Treats common stock is currently priced at $36.72 a share.
The company just paid $2.18 per share as its annual dividend. The dividends have been
increasing by 2.2 percent annually and are expected to continue doing the same. What is the
cost of equity? A) 9.41 percent B) 9.51 percent C) 8.47 percent D) 8.27 percent E) 8.82 percent
A) 1.85 percent - Answer 15) Highway Express has paid annual dividends of $1.32, $1.33,
$1.38, $1.40, and $1.42 over the past five years, respectively. What is the average dividend
growth rate? A) 1.85 percent B) 2.16 percent C) 1.98 percent D) 2.47 percent E) 2.39 percent
C) 10.17 percent - Answer 16) Southern Bakeries just paid its annual dividend of $.48 a share.
The stock has a market price of $17.23 and a beta of .93. The return on the U.S. Treasury bill is
3.1 percent and the market risk premium is 7.6 percent. What is the cost of equity? A) 9.98
percent B) 10.04 percent C) 10.17 percent D) 10.30 percent E) 10.45 percent
