Cost of Capital

1. Cost of Capital refers to:
   (a) Flotation Cost,
   (b) Dividend
   (c) Required Rate of Return
   (d) None of the above
2. Which of the following sources of funds has an implicit Cost of Capital?
   (a) Equity Share Capital
   (b) Preference Share Capital
   (c) Debentures
   (d) Retained Earnings.
3. Which of the following has the highest cost of capital?
   (a) Equity Shares
   (b) Loans,
   (c) Bonds
   (d) Preferences Shares
4. Cost of Capital for Government securities is also known as:
   (a) Risk-free Rate of Interest
   (b) Maximum Rate of Return
   (c) Rate of Interest on fixed Deposits
   (d) None of the above
5. Cost of capital for Bonds and debentures is calculated on:
   (a) Before Tax basis,
   (b) After-Tax basis,
   (c) Risk-free Rate of Interest basis
   (d) None of the above
6. Weighted Average Cost of Capital is generally denoted by:
   (a) k_A
   (b) k_w
   (c) k_o
   (d) k_c
7. Which of the following cost of capital require tax adjustment?
   (a) Cost of Equity Shares
   (b) Cost of Preference Shares
   (c) Cost of Debentures
   (d) Cost of Retained Earnings
8. Which is the most expensive source of funds?
   (a) New Equity Shares
   (b) New Preferences Shares,
   (c) New Debts
   (d) Retained Earnings
9. Marginal Cost of capital is the cost of:
   (a) Additional Sales
   (b) Additional Funds
   (c) Additional Interests
   (d) None of the above
10. In case of firm is all equity financed. WACC would be equal to:
    (a) Cost of debt
    (b) Cost of Equity
    (c) Neither (a) nor (b)
    (d) Both (a) and (b)
11. In case of partially debt-financed firm, k0 is less than:
    (a) k_d
    (b) k_e
    (c) Both (a) and (b)
    (d) None of the above
12. In order to calculate Weighted Average cost of Capital weights may be based on:
    (a) Market Values
    (b) Target Values
    (c) Book Values
    (d) All of the above
13. Firm’s Cost of Capital is the average cost of:
    (a) All sources,
    (b) All borrowings
    (c) All shares Capital
    (d) All Bonds & Debentures
14. An implicit cost of increasing proportion of debt is:
    (a) Tax shield would not be available on new debt
    (b) P.E. Ratio would increase
    (c) Equity Shares holders would demand higher return
    (d) Rate of Return of the company would decrease
15. Cost of Redeemable Preference Share Capital is:
    (a) Rate of Dividend
    (b) After Tax Rate of Dividend
    (c) Discount Rate that equates PV of inflows and outflows relating to capital
    (d) None of the above
16. Which of the following is true?
    (a) Retained earnings are cost free
    (b) External Equity is cheaper than Internal Equity
    (c) Retained Earnings are cheaper than External Equity
    (d) Retain Earnings are costlier than External Equity
17. Cost of capital may be defined as:
    (a) Weighted Average cost of all debts
    (b) Rate of return expected by Equity Shareholders
    (c) Average IRR of the projects of the firm
    (d) Minimum Rate of Return that the firm should earn
18. Minimum Rate of return that a firm must earn in order to satisfy its investors, is also known as:
    (a) Average Return on Investment
    (b) Weighted Average Cost of Capital
    (c) Net Profit Ratio,
    (d) Average Cost of borrowing
19. Cost of Capital for Equity Share Capital does not imply that:
    (a) Market Price is equal to Book Values of Share
    (b) Shareholders are ready to subscribe to right issue
    (c) Market Price is more than issue Price
    (d) All of the three above
20. In order to calculate the proportion of equity financing used by company, the following should be used:
    (a) Authorised Share Capital
    (b) Equity Share Capital plus Reserve and Surplus
    (c) Equity Share Capital plus Preference Share Capital
    (d) Equity Share Capital plus Long-term Debt
21. The term capital structure denotes:
    (a) Total of Liability side of Balance Sheet
    (b) Equity Funds, Preference Capital and Long term Debt
    (c) Total Shareholders’ Equity
    (d) Types of Capital Issued by a company
22. Debt Financing is a cheaper source of finance because of:
    (a) Time Value of Money
    (b) Rate of Interest
    (c) Tax-deductibility of Interest
    (d) Dividends not Payable to lenders
23. In order to find out cost of equity capital under CAPM, which of the following is not required:
    (a) Beta Factor
    (b) Market Rate of Return,
    (c) Market Price of Equity Share
    (d) Risk-free Rate of Interest
24. Tax-rate of relevant and important for calculation of specific cost of capital of:
    (a) Equity Share Capital
    (b) Preferences Share Capital
    (c) Debentures
    (d) (a) and (b) above
25. Advantage of Debt financing is:
    (a) Interest is tax-deductible
    (b) It reduces WACC.
    (c) Does not dilute owners control
    (d) All of the above
26. A single, overall cost of capital is often used to evaluate projects because:
    (a) It avoids the problem of computing the required rate of return for each investment proposal.
    (b) It is the only way to measure a firm’s required return.
    (c) It acknowledges that most new investment projects have about the same degree of risk.
    (d) It acknowledges that most new investment projects offer about the same expected return.
27. Cost of issuing new shares to the public is known as:
    (a) Cost of Equity
    (b) Cost of Capital
    (c) Flotation Cost
    (d) Marginal Cost of Capital.
28. In order to find out cost of equity capital under CAPM, which of the following is not required:
    (a) Beta Factor
    (b) Market Rate of Return
    (c) Market Price of Equity Share
    (d) Risk-free Rate of Interest.