FIN 325 Questions with Correct Answers
Katie owns 100 shares of ABC stock. Which one of the following terms
is used to refer to the return that Katie and the other shareholders require
on their investment in ABC?
A. Weighted average cost of capital
B. Pure play cost
C. Cost of equity
D. Subjective cost
E. Cost of debt Correct Answer-C. Cost of equity
2. Lester lent money to The Corner Store by purchasing bonds issued by
the store. The rate of return that he and the other lenders require is
referred to as the:
A. pure play cost.
B. cost of debt.
C. weighted average cost of capital.
D. subjective cost.
E. cost of equity. Correct Answer-B. cost of debt
3. The weighted average cost of capital is defined as the weighted
average of a firm's:
A. return on its investments.
B. cost of equity and its aftertax cost of debt.
,C. pretax cost of debt and equity securities.
D. bond coupon rates.
E. dividend and capital gains yields. Correct Answer-B. cost of equity
and its aftertax cost of debt.
4. Farmer's Supply, Inc. is considering opening a clothing store, which
would be a new line of business for the firm. Management has decided
to use the cost of capital of a similar clothing store as the discount rate
that should be used to evaluate this proposed expansion. Which one of
the following terms is used to describe the approach Farmer's Supply is
taking to establish an appropriate discount rate for the project?
A. Equity approach
B. Aftertax approach
C. Subjective approach
D. Market play
E. Pure play approach Correct Answer-E. Pure play approach
5. Kate is the CFO of a major firm and has the job of assigning discount
rates to each project that is under consideration. Kate's method of doing
this is to assign an incrementally higher rate as the risk level of the
project increases over that of the current firm. Likewise, she assigns
lower rates as the risk level declines. Which one of the following
approaches is Kate using to assign the discount rates?
A. Pure play approach
B. Divisional rating
C. Subjective approach
,D. Straight WACC approach
E. Equity rating Correct Answer-C. Subjective approach
6. Ted is trying to decide what cost of capital he should assign to a
project. Which one of the following should be his primary consideration
in this decision?
A. Amount of debt used to finance the project
B. Use, or lack thereof, of preferred stock to finance the project
C. Mix of funds used to finance the project
D. Risk level of the project
E. Length of the project's life Correct Answer-D. Risk level of the
project
7. Black Stone Furnaces wants to build a new facility. The cost of capital
for this investment is primarily dependent upon which one of the
following?
A. Firm's overall source of funds
B. Source of the funds used to build the facility
C. Current tax rate
D. The nature of the investment
E. Firm's historical average rate of return Correct Answer-D. The nature
of the investment
8. Which one of the following statements is correct related to the
dividend growth model approach to computing the cost of equity?
, A. The rate of growth must exceed the required rate of return.
B. The rate of return must be adjusted for taxes.
C. The annual dividend used in the computation must be for year one if
you are using today's stock price to compute the return.
D. The cost of equity is equal to the return on the stock plus the risk-free
rate.
E. The cost of equity is equal to the return on the stock multiplied by the
stock's beta Correct Answer-C. The annual dividend used in the
computation must be for year one if you are using today's stock price to
compute the return
9. A firm has a return on equity of 12.4 percent according to the
dividend growth model and a return of 18.7 percent according to the
capital asset pricing model. The market rate of return is 13.5 percent.
What rate should the firm use as the cost of equity when computing the
firm's WACC?
A. 12.4 percent because it is lower than 18.7 percent B. 18.7 percent
because it is higher than 12.4 percent
C. The arithmetic average of 12.4 percent and 18.7 percent
D. The arithmetic average of 12.4 percent, 13.5 percent, and 18.7
percent E. 13.5 percent Correct Answer-C. The arithmetic average of
12.4 percent and 18.7 percent
10. Which of the following features are advantages of the dividend
growth model? I. easy to understand II. model simplicity III. constant
dividend growth rate IV. model's applicability to all common stocks
A. II only
Katie owns 100 shares of ABC stock. Which one of the following terms
is used to refer to the return that Katie and the other shareholders require
on their investment in ABC?
A. Weighted average cost of capital
B. Pure play cost
C. Cost of equity
D. Subjective cost
E. Cost of debt Correct Answer-C. Cost of equity
2. Lester lent money to The Corner Store by purchasing bonds issued by
the store. The rate of return that he and the other lenders require is
referred to as the:
A. pure play cost.
B. cost of debt.
C. weighted average cost of capital.
D. subjective cost.
E. cost of equity. Correct Answer-B. cost of debt
3. The weighted average cost of capital is defined as the weighted
average of a firm's:
A. return on its investments.
B. cost of equity and its aftertax cost of debt.
,C. pretax cost of debt and equity securities.
D. bond coupon rates.
E. dividend and capital gains yields. Correct Answer-B. cost of equity
and its aftertax cost of debt.
4. Farmer's Supply, Inc. is considering opening a clothing store, which
would be a new line of business for the firm. Management has decided
to use the cost of capital of a similar clothing store as the discount rate
that should be used to evaluate this proposed expansion. Which one of
the following terms is used to describe the approach Farmer's Supply is
taking to establish an appropriate discount rate for the project?
A. Equity approach
B. Aftertax approach
C. Subjective approach
D. Market play
E. Pure play approach Correct Answer-E. Pure play approach
5. Kate is the CFO of a major firm and has the job of assigning discount
rates to each project that is under consideration. Kate's method of doing
this is to assign an incrementally higher rate as the risk level of the
project increases over that of the current firm. Likewise, she assigns
lower rates as the risk level declines. Which one of the following
approaches is Kate using to assign the discount rates?
A. Pure play approach
B. Divisional rating
C. Subjective approach
,D. Straight WACC approach
E. Equity rating Correct Answer-C. Subjective approach
6. Ted is trying to decide what cost of capital he should assign to a
project. Which one of the following should be his primary consideration
in this decision?
A. Amount of debt used to finance the project
B. Use, or lack thereof, of preferred stock to finance the project
C. Mix of funds used to finance the project
D. Risk level of the project
E. Length of the project's life Correct Answer-D. Risk level of the
project
7. Black Stone Furnaces wants to build a new facility. The cost of capital
for this investment is primarily dependent upon which one of the
following?
A. Firm's overall source of funds
B. Source of the funds used to build the facility
C. Current tax rate
D. The nature of the investment
E. Firm's historical average rate of return Correct Answer-D. The nature
of the investment
8. Which one of the following statements is correct related to the
dividend growth model approach to computing the cost of equity?
, A. The rate of growth must exceed the required rate of return.
B. The rate of return must be adjusted for taxes.
C. The annual dividend used in the computation must be for year one if
you are using today's stock price to compute the return.
D. The cost of equity is equal to the return on the stock plus the risk-free
rate.
E. The cost of equity is equal to the return on the stock multiplied by the
stock's beta Correct Answer-C. The annual dividend used in the
computation must be for year one if you are using today's stock price to
compute the return
9. A firm has a return on equity of 12.4 percent according to the
dividend growth model and a return of 18.7 percent according to the
capital asset pricing model. The market rate of return is 13.5 percent.
What rate should the firm use as the cost of equity when computing the
firm's WACC?
A. 12.4 percent because it is lower than 18.7 percent B. 18.7 percent
because it is higher than 12.4 percent
C. The arithmetic average of 12.4 percent and 18.7 percent
D. The arithmetic average of 12.4 percent, 13.5 percent, and 18.7
percent E. 13.5 percent Correct Answer-C. The arithmetic average of
12.4 percent and 18.7 percent
10. Which of the following features are advantages of the dividend
growth model? I. easy to understand II. model simplicity III. constant
dividend growth rate IV. model's applicability to all common stocks
A. II only
