FIN 300 UPDATED EXAMINERS QUESTIONS AND
ANSWERS SURE A+
✔✔Utilizing the CAPM to estimate the cost of capital for a project is difficult in practice
because analysts do not have the stock returns from individual projects that are
necessary to use in a regression analysis for estimating a project's beta - ✔✔False
✔✔Estimates of expected returns based on market security prices will be reliable in all
types of markets, including those deemed less efficient than others. - ✔✔False
✔✔If a firm is currently paying common share dividends to investors and those
dividends are expected to grow at a low but steady rate in the future, then the cost of
common equity for the firm can be determined by also using the current price of the
firm's common shares - ✔✔True
✔✔The correctly calculated weighted average cost of capital for a firm can be used to
discount the cash flows for any new project that the firm may undertake in the future -
✔✔False
✔✔the estimated cost of capital the financial manager use for efficiency projects tends
to be higher than the cost of capital used the evaluate new projects - ✔✔False
✔✔The recommended model to estimate the cost of common equity for a firm is
A) the one-stage constant growth dividend model
B) the multistage-growth dividend model
C) the capital asset pricing model (CAPM)
D) none of the above - ✔✔C) the capital asset pricing model (CAPM)
✔✔The best method to use when estimating a firm's discount rate is the
A) internal rate of return approach
B) net present value approach
C) capital asset pricing model
, D) weighted average cost of capital approach - ✔✔D) weighted average cost of capital
approach
✔✔A firm's cost of capital is a weighted average of all its
A) working capital costs
B) operating costs
C) financing costs
D) investment costs - ✔✔C) financing costs
✔✔Which of the following capital component costs must be adjusted for taxes
A) cost of common stock
B) cost of debt
C) cost of preferred stock
D) all of the above - ✔✔B) cost of debt
✔✔When estimating the cost of debt to use in the WACC, which of the following types
of debt should be included?
A) Lines of credit
B) commercial paper
C) publicly traded bonds
D) all of the above - ✔✔C) publicly traded bonds
✔✔The cost of preferred stock is the same as its dividend yield - ✔✔True
✔✔Which of the following is true of the cost of debt
A) A firm's interest payments are tax deductible
B) A firm's beta influences its cost of debt
C) A firm's cost of debt will always be greater than its cost of equity
D) A firm's credit ratings have no impact on its cost of debt - ✔✔A) A firm's interest
payments are tax-deductible
✔✔When estimating the cost of debt, one should average the costs of short-term and
long0term debt issues of a corporation - ✔✔False (The cost of debt is calculated by
solving for the yield to maturity of the debt using the bond pricing model, computing the
effective annual yield, and adjusting for taxes)
✔✔A significant number of venture capital firms focus on mature businesses - ✔✔False
✔✔Traditional sources of funding, such as from financial and insurance firms, work for
new or emerging businesses despite the presence of only intangible assets - ✔✔False
✔✔In a best-effort offering, the underwriter promises to make its "best effort" to sell all
securities at a certain price - ✔✔False
ANSWERS SURE A+
✔✔Utilizing the CAPM to estimate the cost of capital for a project is difficult in practice
because analysts do not have the stock returns from individual projects that are
necessary to use in a regression analysis for estimating a project's beta - ✔✔False
✔✔Estimates of expected returns based on market security prices will be reliable in all
types of markets, including those deemed less efficient than others. - ✔✔False
✔✔If a firm is currently paying common share dividends to investors and those
dividends are expected to grow at a low but steady rate in the future, then the cost of
common equity for the firm can be determined by also using the current price of the
firm's common shares - ✔✔True
✔✔The correctly calculated weighted average cost of capital for a firm can be used to
discount the cash flows for any new project that the firm may undertake in the future -
✔✔False
✔✔the estimated cost of capital the financial manager use for efficiency projects tends
to be higher than the cost of capital used the evaluate new projects - ✔✔False
✔✔The recommended model to estimate the cost of common equity for a firm is
A) the one-stage constant growth dividend model
B) the multistage-growth dividend model
C) the capital asset pricing model (CAPM)
D) none of the above - ✔✔C) the capital asset pricing model (CAPM)
✔✔The best method to use when estimating a firm's discount rate is the
A) internal rate of return approach
B) net present value approach
C) capital asset pricing model
, D) weighted average cost of capital approach - ✔✔D) weighted average cost of capital
approach
✔✔A firm's cost of capital is a weighted average of all its
A) working capital costs
B) operating costs
C) financing costs
D) investment costs - ✔✔C) financing costs
✔✔Which of the following capital component costs must be adjusted for taxes
A) cost of common stock
B) cost of debt
C) cost of preferred stock
D) all of the above - ✔✔B) cost of debt
✔✔When estimating the cost of debt to use in the WACC, which of the following types
of debt should be included?
A) Lines of credit
B) commercial paper
C) publicly traded bonds
D) all of the above - ✔✔C) publicly traded bonds
✔✔The cost of preferred stock is the same as its dividend yield - ✔✔True
✔✔Which of the following is true of the cost of debt
A) A firm's interest payments are tax deductible
B) A firm's beta influences its cost of debt
C) A firm's cost of debt will always be greater than its cost of equity
D) A firm's credit ratings have no impact on its cost of debt - ✔✔A) A firm's interest
payments are tax-deductible
✔✔When estimating the cost of debt, one should average the costs of short-term and
long0term debt issues of a corporation - ✔✔False (The cost of debt is calculated by
solving for the yield to maturity of the debt using the bond pricing model, computing the
effective annual yield, and adjusting for taxes)
✔✔A significant number of venture capital firms focus on mature businesses - ✔✔False
✔✔Traditional sources of funding, such as from financial and insurance firms, work for
new or emerging businesses despite the presence of only intangible assets - ✔✔False
✔✔In a best-effort offering, the underwriter promises to make its "best effort" to sell all
securities at a certain price - ✔✔False
