SOLVED

1) Why is the cost of capital is considered an Opportunity Cost? A) The interest is an expense that allows for the opportunity of undertaking the project. B) The value of the capital invested in the business is the cost to the business of not undertaking a different project of similar risk. C) The returns to the business represent the opportunity for which the capital invested is the cost. D) The business is indifferent to investing in any project that provides similar returns for a similar level of risk. E) The returns to investors supplying the capital must equal to or greater than that which could be had from other projects of similar risk. 2) Several managers suggested that the company’s financial analysts should add 0.5% to the hurdle rate when calculating the IRR of any investment opportunity to provide an added margin of safety and reduce their performance pressure. What would this action do? A) Improve shareholder wealth by reducing the risk associated with the outcomes of those projects that were accepted. B) Reduce shareholder wealth by rejecting otherwise acceptable projects. C) Reduce shareholder wealth by accepting otherwise unacceptable projects. D) Improve shareholder wealth by increasing the percent return of projects undertaken. E) Improve shareholders’ wealth by reflecting the added risk perceived by the company’s managers. 3) Which of the following is an internal source of long-term capital? A) Retained Earnings. B) Common Shares C) Preferred Shares D) Bonds E) Loans 4) When determining the value of a share by the Dividend-Based Approach, which of the following provides the best reason for the life time of the business being the relevant timeframe over which to consider the dividend stream? A) It is always recommended that shares be held over the long term. B) The NPV of the future dividend stream will determine the price of the share whenever it is sold. C) The inaccuracies inherent in this method are less of a problem than the inaccuracies inherent in other valuation methods. D) It is easy to estimate the lifetime of a corporation based on historical averages. E) Individuals planning to hold shares for the short term can adjust the share’s value proportionally to the length of time they hold the share. 5) What is the cost of shares to the business is equivalent to? A) The average year-over-year percent increase in share price. B) The NPV of the return to the company from its investments. C) The bank rate grossed up by a risk premium and the rate of inflation. D) The IRR used to evaluate the company’s investment projects. E) The NPV of the future share prices. 6) EnerGrowth Industries Ltd. has 3.3 million common shares outstanding with a current market price of $25.50. Now, as in the future, the annual dividend is expected to be $2.50. What is the cost of share capital to the business? A) 2.0% B) 9.8% C) 14.5% D) $8.25 million E) $84.15 million 7) Manchester Mechanical Ltd. paid a dividend this year of $6.30 on each of its 450,000 common shares outstanding. Current market price is $56.00. Dividends are expected to grow by 1.5% per year. What is the cost of share capital to the business? A) 11.3% B) 11.4% C) 12.8% D) $2.88 million E) $25.2 million 8) If the risk co-efficient, beta, for McDonald’s Corporation is .9, what can be said about the fluctuation of the company’s returns? A) They are similar to, but not as volatile, as the returns from the market as a whole. B) They are nearly non-existent. C) They cannot be calculated without a beta value for the market as a whole. D) They are significantly more volatile than the returns from the market a whole. E) They are similar to, but more volatile, than the returns from the market as a whole. 9) The returns from Guardian Grocers Ltd. are approximately three-quarters as volatile as that of the market as a whole. If 90-day Treasury bills are trading at 4.2%, the expected return to the market over the next period is 7%, what is the required rate of return by shareholders for Guardian Grocers Ltd.? A) 4.5 B) 5.2 C) 6.3 D) 7.9 E) 9.1 10) Which of the following is an assumption of the Capital Asset Pricing Model? A) Very few investors hold fully diversified portfolios. B) The relationship between beta and expected returns are seldom linear. C) Returns on specific shares are affected by general market changes only. D) Beta values tend to be unstable over the long term. E) Historical data can be used to predict the future. 1