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Question 1
1. Which of the following statements is incorrect?
a. The slope of the security market line is measured by beta.
b. Two securities with the same stand-alone risk can have different betas.
c. Company-specific risk can be diversified away.
d. The market risk premium is affected by attitudes about risk.
e. Higher beta stocks have a higher required return.
1 points
Question 2
1. Which of the following statements is CORRECT?
The WACC as used in capital budgeting is an estimate of a company’s before-tax cost of capital.
The percentage flotation cost associated with issuing new common equity is typically smaller than the flotation cost for new debt.
The WACC as used in capital budgeting is an estimate of the cost of all the capital a company has raised to acquire its assets.
There is an “opportunity cost” associated with using retained earnings, hence they are not “free.”
The WACC as used in capital budgeting would be simply the after-tax cost of debt if the firm plans to use only debt to finance its capital budget during the coming year.
1 points
Question 3
1. You were recently hired by Scheuer Media Inc. to estimate its cost of capital. You obtained the following data: D1 = $1.75; P0 = $95.00; g = 7.00% (constant); and F = 5.00%. What is the cost of equity raised by selling new common stock?
11.08%
8.49%
9.21%
8.94%
6.97%
1 points
Question 4
1. Your company’s stock sells for $50 per share, its last dividend (D0) was $2.00, its growth rate is a constant 5 percent, and the company will incur a flotation cost of 15 percent if it sells new common stock. What is the firm’s cost of new equity?
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