Cost of Capital Quiz Answers and Explanations - Prof. Stephen V. Smith, Quizzes of Financial Management

Download Cost of Capital Quiz Answers and Explanations - Prof. Stephen V. Smith and more Quizzes Financial Management in PDF only on Docsity! Question 1 1 out of 1 points The before-tax cost of debt, which is lower than the after-tax cost, is used as the component cost of debt for purposes of developing the firm's WACC. Answer Selected Answer: b. Fals e Correct Answer: b. Fals e Question 2 1 out of 1 points The cost of debt is equal to one minus the marginal tax rate multiplied by the coupon rate on outstanding debt. Answer Selected Answer: a. Fals e Correct Answer: a. Fals e Question 3 1 out of 1 points In capital budgeting and cost of capital analyses, the firm should always consider retained earnings as the first source of capital, since this is a free source of funding to the firm. Answer Selected Answer: b. Fals e Correct Answer: b. Fals e Question 4 1 out of 1 points The firm's cost of external equity capital is the same as the required rate of return on the firm's outstanding common stock. Answer Selected b. Answer: Fals e Correct Answer: b. Fals e Question 5 1 out of 1 points If expectations for long-term inflation rose, but the slope of the SML remained constant, this would have a greater impact on the required rate of return on equity, rs, than on the interest rate on long-term debt, rd, for most firms. In other words, the percentage point increase in the cost of equity would be greater than the increase in the interest rate on long-term debt. Answer Selected Answer: b. Fals e Correct Answer: b. Fals e Question 6 1 out of 1 points Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital as it applies to capital budgeting? Answer Selected Answer: c. Accounts payable. Correct Answer: c. Accounts payable. Question 7 1 out of 1 points Which of the following is not considered a capital component for the purpose of calculating the weighted average cost of capital as it applies to capital budgeting? Answer Selected Answer: c. Short-term debt used to finance seasonal current assets.