CPA C02 Unit 4 Quiz Calculating Cost of Equity, WACC & Required
Rate of Return | Questions and Answers | 2025 Update | 100%
Correct.
Unit 4 Quiz - Results
Attempt 1 of Unlimited
Written Aug 16, 2024 12:40 AM - Aug 16, 2024 1:37 AM
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n1
The current risk-free rate is 2.1% and the market risk premium is 5%.
XYC Co.’s common equity has a beta of 1.5.
Which one of the following is the expected cost of equity for XYC?
Question options:
a) 6.45%
b) 8.15%
c) 9.6%
d) 10.65%
Hide question 1 feedback
Option c) is correct. The expected cost of equity is calculated as 2.1% + 1.5(5%) = 9.6%.
n2
Karry’s Care Ltd. has a current yield on debt of 7% and a current cost
of equity of 10%. The weighting of debt in the company’s current
capital structure is 35%. The company’s income tax rate is 22%.
Which one of the following is the weighted average cost of capital
(WACC) for Karry’s Care?
Question options:
a) 7%
b) 7.5%
c) 8.4%
, d) 8.9%
Hide question 2 feedback
Option c) is correct. 35%(7%)(1 – 0.22) + 65% (10%) = 1.9% + 6.5% = 8.4%.
n3
The shares of Sunshine Ltd. are currently trading at $54.65 per share
and have a beta of 1.5. The risk-free rate of return is 2.0% and the
average market risk premium is 4.5%.
Which one of the following is the required rate of return on
Sunshine’s shares?
Question options:
a) 5.75%
b) 6.75%
c) 8.75%
d) 11.75%
Hide question 3 feedback
Option c) is correct. The cost of equity is calculated as follows: CAPM = Rf + β (Rm – Rf) = 2.0% + 1.5(4.5%)
n4
A company has outstanding debt with a current market value of
$1,058, a face value of $1,000, and an annual coupon rate of 6%,
paid semi-annually. The bond has seven years to maturity.
Which one of the following is the bond’s current cost of debt, before
tax?
Question options:
a) 2.5%
b) 4.2%
c) 5.0%
, d) 10.8%
Hide question 4 feedback
Option c) is correct. PV = –$1,058; FV = $1,000; PMT = $30 (1,000 × 6% / 2); N = 14 (2 × 7); CPT I/Y = 2.5
5%.
n5
SCC Inc. has the following financial information reported at current
market values:
Current liabilities $900,000
Long-term debt $1,300,000
Total liabilities $2,200,000
Preferred shares $3,500,000
Common equity $6,200,000
The long-term debt consists of a single bond issue paying 6% interest
annually. These bonds currently yield 7.5% in the market. The
current cost of the preferred shares is 8%. The current cost of the
common shares is 12%. The company’s tax rate is 20%.
Which one of the following is SCC’s weighted average cost of capital
(WACC), rounded to the nearest 10th of a percent?
Question options:
a) 9.2%
b) 9.7%
c) 10.0%
d) 10.2%
Rate of Return | Questions and Answers | 2025 Update | 100%
Correct.
Unit 4 Quiz - Results
Attempt 1 of Unlimited
Written Aug 16, 2024 12:40 AM - Aug 16, 2024 1:37 AM
Your quiz has been submitted successfully.
n1
The current risk-free rate is 2.1% and the market risk premium is 5%.
XYC Co.’s common equity has a beta of 1.5.
Which one of the following is the expected cost of equity for XYC?
Question options:
a) 6.45%
b) 8.15%
c) 9.6%
d) 10.65%
Hide question 1 feedback
Option c) is correct. The expected cost of equity is calculated as 2.1% + 1.5(5%) = 9.6%.
n2
Karry’s Care Ltd. has a current yield on debt of 7% and a current cost
of equity of 10%. The weighting of debt in the company’s current
capital structure is 35%. The company’s income tax rate is 22%.
Which one of the following is the weighted average cost of capital
(WACC) for Karry’s Care?
Question options:
a) 7%
b) 7.5%
c) 8.4%
, d) 8.9%
Hide question 2 feedback
Option c) is correct. 35%(7%)(1 – 0.22) + 65% (10%) = 1.9% + 6.5% = 8.4%.
n3
The shares of Sunshine Ltd. are currently trading at $54.65 per share
and have a beta of 1.5. The risk-free rate of return is 2.0% and the
average market risk premium is 4.5%.
Which one of the following is the required rate of return on
Sunshine’s shares?
Question options:
a) 5.75%
b) 6.75%
c) 8.75%
d) 11.75%
Hide question 3 feedback
Option c) is correct. The cost of equity is calculated as follows: CAPM = Rf + β (Rm – Rf) = 2.0% + 1.5(4.5%)
n4
A company has outstanding debt with a current market value of
$1,058, a face value of $1,000, and an annual coupon rate of 6%,
paid semi-annually. The bond has seven years to maturity.
Which one of the following is the bond’s current cost of debt, before
tax?
Question options:
a) 2.5%
b) 4.2%
c) 5.0%
, d) 10.8%
Hide question 4 feedback
Option c) is correct. PV = –$1,058; FV = $1,000; PMT = $30 (1,000 × 6% / 2); N = 14 (2 × 7); CPT I/Y = 2.5
5%.
n5
SCC Inc. has the following financial information reported at current
market values:
Current liabilities $900,000
Long-term debt $1,300,000
Total liabilities $2,200,000
Preferred shares $3,500,000
Common equity $6,200,000
The long-term debt consists of a single bond issue paying 6% interest
annually. These bonds currently yield 7.5% in the market. The
current cost of the preferred shares is 8%. The current cost of the
common shares is 12%. The company’s tax rate is 20%.
Which one of the following is SCC’s weighted average cost of capital
(WACC), rounded to the nearest 10th of a percent?
Question options:
a) 9.2%
b) 9.7%
c) 10.0%
d) 10.2%
