Reference no: EM133112054

1. When can the cost of capital for a company as a whole be a valid measure of the cost of capital for a particular project?

A. When market data are available.

B. When it is not practicable to estimate the cost of capital for individual projects.

C. When the risk of a new project is the same as the risk of the company's existing assets.

D. When CAPM is used as an ex-post model.

2. Share prices of companies paying franked dividends:

A. should have increased since the introduction of dividend imputation because overseas residents would have sold this type of shares.

B. should have increased since the introduction of dividend imputation because they have become more attractive to Australian investors.

C. have not changed as a result of imputation. should have decreased since the introduction of dividend imputation because overseas residents are unable to use franking credits

D. should have decreased since the introduction of dividend imputation because overseas residents are unable to use franking credits

3. A problem with estimating the cost of capital for a project using the CAPM derived from market data is that:

A. the estimate for standard deviation is not obtainable.

B. a value for the risk-free rate of interest is not available.

C. it is not possible to estimate systematic risk from market data.

D. individual investment projects are not traded on a stock exchange.

4. If a firm accepts Project A it will not be feasible to also accept Project B because both projects would require the simultaneous and exclusive use of the same piece of machinery. These projects are considered to be:

A. mutually exclusive.

B. independent.

C. interdependent.

D. economically scaled.

5. Calculate the weighted average cost of preference shares and ordinary shares if there are: 1 million preference shares with market value of $2.50 each and an opportunity cost of 10.8%; 10 million ordinary shares with market value of $4.50 each and an opportunity cost of 16.5%.

A. 16.2%

B. 15.4%

C. 16.9% 3

D. 15.9%

6. When considering personal taxes (but ignoring imputation):

A. effectively, the marginal tax rate on share income is greater than on debt income.

B. the tax deductibility of interest could never be fully offset by the tax differential on income to debtholders and shareholders.

C. tax paid on company income is zero.

D. the benefit of the tax deductibility of interest may be offset by the fact that investors need to be compensated for the higher personal tax on income to debtholders than shareholders.

7. A reason why shareholders may prefer dividend income to expected capital gains is because:

A. the effective rate of capital gains tax is likely to be less than an investor's marginal income tax.

B. shareholders who require current income can always sell a portion of their portfolio.

C. they distrust future projections.

D. transaction costs such as brokerage fees make selling shares less attractive.

8. Modigliani and Miller's Proposition 1 states that:

A. the value of a company depends on its capital structure.

B. the value of a company depends on the debt to assets ratio.

C. the value of a company depends on the debt to total assets ratio.

D. the value of a company is independent of its capital structure.

9. A consequence for a company that uses a single discount rate to evaluate projects is that:

A. high systematic risk divisions will find it hard to have their projects accepted.

B. the systematic risk of the company will drift upward over time.

C. low systematic risk divisions will find it easy to have their projects accepted.

D. high systematic risk divisions are likely to stagnate and even close down.

10. An annuity in which the first cash flow is to occur after a time period that exceeds the time period between each subsequent cash flow is known as a/an:

A. growth annuity.

B. deferred annuity.

C. ordinary annuity.

D. annuity due