Scribd
Upload
91 views3 pages

Exercise 3: Part I. Multiple Choice

The document contains sample exam questions on capital budgeting and cost of capital concepts. It includes multiple choice, true/false, and calculation questions. Some key points covered are: - Cost of equity is higher than the cost of debt - The weighted average cost of capital depends on capital structure and the costs of each component - Net present value and accepting projects where NPV is positive are decision criteria for capital budgeting

Uploaded by

Anwar Adem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
91 views3 pages

Exercise 3: Part I. Multiple Choice

The document contains sample exam questions on capital budgeting and cost of capital concepts. It includes multiple choice, true/false, and calculation questions. Some key points covered are: - Cost of equity is higher than the cost of debt - The weighted average cost of capital depends on capital structure and the costs of each component - Net present value and accepting projects where NPV is positive are decision criteria for capital budgeting

Uploaded by

Anwar Adem
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd
You are on page 1/ 3

Exercise 3

Part I. Multiple choice


1. The return shareholders require on their investment in a firm is called the:
a. Dividend yield.
b. Cost of equity.
c. Capital gains yield.
d. Cost of capital.
e. Income return
2. The cost of capital primarily depends on the:
a. Debt-equity ratio.
b. Applicable tax rate.
c. Cost of equity financing.
d. Cost of debt.
e. Use of the funds.
3. Cost of equity is:
a. Higher than net borrowing cost
b. Lower than net borrowing cost
c. At the same level as net borrowing cost
d. All of the above
e. None of the above

Part I. multiple choice


1. B
2. E
3. A
4. B
5. A

Part I: True or False


1. The rationale behind the longer the payback period, the less risky the project and the greater
the liquidity.

2. The Specific Cost of Capital of the firm’s capital is supplied by its creditors and owners.
3. The cost of preferred stock is the rate of return investors require on a company’s new debt
plus the cost of issuing the debt.
4. For the Independent Projects decision rule accept the project if the NPV greater than one and
reject the project if the NPV less than one.
5. The traditional method of the capital budgeting does not consider the time value of money.
15If MoND gets 500,000 birr budget to buy car and you've been offered your choice of buying either
a Toyota car or Lifan car. This is an example of INDEPENDENT projects.
6.
Which of the following is not a source of long-term funds?

a. Bond
b. Common stock
c. Preferred stock
d. Capital lease
e. None of the above
Why capital budgeting becomes important and need proper decision?
Capital investment decisions may require large sums of money
Capital investment effect on future direction
Capital investment is difficult to reverse
All of the above

1. Suppose a project with life of five years and initial investment cost of Br 80,000 is expected to
generate a cash flow of Br 15,000, Br 20,000, Br 25,000, Br 30,000 and Birr 20,000 for year 1 up
to years 5 respectively. If the cost of capital is given to be 10%, what is the NPV of the project
and decision respectively?
A. (Br 1800.05) and reject the project C. (Br 3, 417.35) and reject the project

B. Br 2005 and Accept the project D. Br 1, 856.97 and Accept the project

2. Which one is not true about classification of capital investment projects?

A. Independent Projects are the acceptance or rejection of one project does not directly
Eliminate other project
B. Mutually Exclusive Projects are those projects that cannot be perused simultaneously
C. Mutually Exclusive Projects are the acceptance or rejection of one project does not
Eliminate other projects
D. All of the above
3. The company's optimum capital structure is compatible with .
A. Minimizing the company's weighted average cost of capital
B. Maximizing the value of the company
C. Maximizing the company's share price
D. All of the above
4. Global Corp. has debt with a market value of $80,000 and common equity with a market value of
$120,000. The component costs of the capital structure for Global Corp. are 7.4 percent for bond
and 16.4 percent for common equity. What is the weighted average cost of capital for Global
Corp.?
A. 7.4%. B. 12.8%. C. 16.4%. D. 19.6%.

1. Which one of the following is/are the importance of cost of capital


A. It is used to accept or reject investment
B. It helps to take decision regarding capital structure
C. It assists to evaluate the financial performance of the firm
D. All of the above

2. Find the Expected Return on Stock i given that the Expected Return on the Market
Portfolio is 11.5%, the Risk-Free Rate is 4.8%, and the Beta for Stock i is 2.8.
A) 32.20% B) 23.02% C) 23.56% D) 23.98%
A Company produces and sells 10,000 shirts. The selling price per shirt is Br.500. Variable cost
is Br. 200 per shirt and fixed operating cost is Br. 2,500,000.
_____8. What is operating leverage?
a. 5 times
b. 6 times
c. 4 times
d. Impossible to calculate
_____9. If sales are up by 10%, then what is the impact on PBIT?
a. 5 times
b. 6 times
c. 4 times
d. Impossible to calculate
Lukas sports produce basketballs. The company sells 400,000 basketballs every year. Each basketball
produced has a variable operating cost of Br. 0.84 and sells for Br.1. total fixed operating costs per year
are Br.28, 000. The Company has incurred Br. 6,000 of interest charges per year. The annual preferred
stock dividend amounts to Br. 2,000. The company’s net profit before tax is subject to a 40 percent tax
rate.
Required: For Lukas company,

a. Calculate the degree of operating leverage


b. Calculate the degree of financial leverage

You might also like