Premium Essay

North West Company Case

In: Business and Management

Submitted By florino
Words 3901
Pages 16
CHAPTER 12
Risk, Cost of Capital, and Capital Budgeting

Multiple Choice Questions:

I. DEFINITIONS

WACC e 1. The weighted average of the firm’s costs of equity, preferred stock, and after tax debt is the: a. reward to risk ratio for the firm. b. expected capital gains yield for the stock. c. expected capital gains yield for the firm. d. portfolio beta for the firm. e. weighted average cost of capital (WACC).

Difficulty level: Easy

CAPM b 2. If the CAPM is used to estimate the cost of equity capital, the expected excess market return is equal to the: a. return on the stock minus the risk-free rate. b. difference between the return on the market and the risk-free rate. c. beta times the market risk premium. d. beta times the risk-free rate. e. market rate of return.

Difficulty level: Easy

CHARACTERISTIC LINE c 3. The best fit line of a pairwise plot of the returns of the security against the market index returns is called the: a. Security Market Line. b. Capital Market Line. c. characteristic line. d. risk line. e. None of the above.

Difficulty level: Medium

USE OF DEBT c 4. The use of debt is called: a. operating leverage. b. production leverage. c. financial leverage. d. total asset turnover risk. e. business risk.

Difficulty level: Medium

WEIGHTED AVERAGE COST OF CAPITAL b 5. The weighted average cost of capital for a firm is the: a. discount rate which the firm should apply to all of the projects it undertakes. b. overall rate which the firm must earn on its existing assets to maintain the value of its stock. c. rate the firm should expect to pay on its next bond issue. d. maximum rate which the firm should require on any…...

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