K = (1 - λ) K K = weighted average cost of capital K i = before-tax borrowing cost

17
Student: ___________________________________________________________________________
1.
The cost of capital is

A. the minimum rate of return an investment project must generate in order to pay its financing costs.
B. the minimum rate of return an investment project must generate in order to pay its financing costs plus
a reasonable profit.
C. the maximum rate of return an investment project must generate in order to pay its financing costs.
D. the maximum rate of return an investment project must generate in order to pay its financing costs plus
a reasonable profit.
2.
For a firm that has both debt and equity in its capital structure, its financing cost can be represented by the
weighted average cost of capital that is computed by
A. weighing the pre-tax borrowing cost of the firm and the cost of equity capital, using the debt as the
weight.
B. weighing the after-tax borrowing cost of the firm and the cost of equity capital, using the debt as the
weight.
C K = (1 - )K + (1 - )i
l
. where:
K = weighted average cost of capital
Kl = cost of equity capital for a leveraged firm
i = before-tax borrowing cost
= marginal corporate income tax rate
= debt-to-total-market-value ratio
D. b and c
3.
In the notation of the book, K = (1 - )Kl + (1 - )i

Which of these are correct?
A. The debt-to-equity ratio is
B. The tax rate is
C. The after-tax cost of debt capital is i
D. All of the above
4.

Which of the following are correct?
A. The debt-to-total market value ratio is
B. The tax rate is i
D. All of the above
5.

B. The cost of equity capital for a levered firm is K
C. The pre-tax cost of debt capital is i
D. All of the above
6.

B. The cost of equity capital for a levered firm is Kl
D. All of the above
7.

A. The weighted average cost of capital for a levered firm is K
B. The tax rate is
D. All of the above
8.
At the optimal capital structure,

A. K = (1 - )K + (1 - )i will be minimized.
l
B. The debt-equity ratio will be equal to the debt-to-value ratio.

C. K = (1 - )K + (1 - )i will be maximized.
l
D. None of the above
9.
Solve for the weighted average cost of capital:
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
10. Solve for the weighted average cost of capital:
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
A. 8.67%
B. 8.00%
C. 7.60%
D. 7.33%
E. 7.14%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
A. 7.00%
B. 6.89%
C. 6.73%
D. 6.67%
E. 6.57%
29. Find the debt-to-value ratio for a firm with a debt-to-equity ratio of .
A.
B.
C. 3/5
D.
E. 5/7
30. Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1.
A.
B.
C. 3/5
D.
E. 5/7
A.
B.
C. 3/5
D.
E. 5/7
A.
B.
C. 3/5
D.
E. 5/7
A.
B.
C. 3/5
D.
E. 5/7
A.
B.
C. 3/5
D.
E. 5/7
A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
38. Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4 .
A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
40. Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of .
A. 1
B. 2
C. 3
D. 4
E. 5
A. 1
B. 2
C. 3
D. 4
E. 5
A. 1
B. 2
C. 3
D. 4
E. 5
43. Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 4/5.
A. 1
B. 2
C. 3
D. 4
E. 5
44. Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 5/6.
A. 1
B. 2
C. 3
D. 4
E. 5
45. Corporations are becoming multinational not only in the scope of their business activities but also in their
capital structure
A. by raising funds from domestic as well as government sources.
B. by raising funds from foreign as well as domestic sources.
Cthis trend reflects not only a conscious effort on the part of firms to raise the cost of capital by
. international sourcing of funds but also the ongoing liberalization and deregulation of international
financial markets that make them accessible for many firms.
D. both b and c
46. Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1, a tax rate of
34%, a levered cost of equity of 12% and an after-tax cost of debt of 8%.
A. 9.6%
B. 7.968%
C. 14%
D. none of the above
47. Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1, a tax rate of
34%, a levered cost of equity of 12% and a pre-tax cost of debt of 10%.
A. 9.6%
B. 7.968%
C. 8.76%
48. Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 2, a tax rate of 40%,
a levered cost of equity of 12% and an after-tax cost of debt of 9%.
A. 7.6%
B. 7.968%
C. 10%
49. Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 2, a tax rate of 40%,
a levered cost of equity of 12% and a pre-tax cost of debt of 9%.
A. 7.6%
B. 7.968%
C. 10%
50. The cost of equity capital is
A. the expected return on the firm's stock that investors require.
B. frequently estimated by using the Capital Asset Pricing Model (CAPM).
C. generally considered to be a linear function of the systematic risk inherent in the security.
D. all of the above
51. A reduced cost of equity capital increases the firm's value
A. through revaluation of the firm's existing cash flows from existing projects.
B. through increased investment as more projects become positive NPVs.
C. both a and b
52. A value-maximizing firm's would
A. undertake an investment project as long as the IRR exceeds the NPV.
B. undertake an investment project as long as the IRR is less than the cost of capital.
C. undertake an investment project as long as the IRR exceeds the cost of capital.
53. Using the notation of the text, the CAPM states:
A.
B.
C.
54. The common stock of Kansas City Power and Light has a beta of 0.80. The Treasury bill rate is 4 percent
and the market risk premium is 8 percent. KCP&L is in the 34% tax bracket. What is their cost of equity
capital?
A. 12.0%
B. 10.4%
C. 7.20%
D. 6.4%
E. 8.22%
55. The market risk premium
A. can be defined by the difference between the expected market return and the risk-free rate.
B. is the reward for bearing nondiversifiable risk.
C. is the slope of the security market line.
D.
E. all of the above are correct
56. Compute the debt-to-equity ratio for a firm that has a debt-to-value ratio of 60%.
A. 1/3
B. 2/5
C. 3/2
D. 2/3
E. None of the above
57. Compute the debt-to-total-value ratio for a firm that has a debt-to-equity ratio of 2.
A. 1/3
B. 2/5
C. 3/2
D. 2/3
58. Micro Spinoffs, Inc., issued 20-year debt one year ago today at par value with a coupon rate of 9 percent,
paid annually. Today, the debt is selling at $1,050. If the firm's tax rate is 34%, what is its after-tax cost
of debt?
A. 9%
B. 8.46%
C. 5.94%
D. 5.58%
59. The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 4; the
risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%. What is
the firm's cost of equity capital?
A. 33.33%
B. 10.85%
C. 13.12%
D. 16.50%
60. Systematic risk refers to
A. the diversifiable (company specific) risk of an asset.
B. the nondiversifiable (market) risk of an asset.
C. economic and political risk.
D. the risk that can be hedged.
61. The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 4; the
risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%. Calculate
the weighted average cost of capital.
A. 33.33%
B. 8.09%
C. 9.02%
D. 16.5%
62. The formula for beta is:
A.
B.
C.
D.
63. In the Capital Asset Pricing Model (CAPM), the term Beta, , is
A. a measure of systematic risk inherent in a security.
B calculated as the "covariance of future returns between a specific security and the market portfolio"
. divided by the "variance of returns of the market portfolio".
C. both a and b
64. Assume that XYZ Corporation is a levered company with the following information:
Kl = cost of levered equity capital for XYZ = 13%
i = before-tax borrowing cost = 8%
t = marginal corporate income tax rate = 30%
If XYZ's debt-to-total-market-value ratio is 40%, then its weighted average cost of capital, K, is:
A. 8%
B. 9%
C. 10%
D. 12%
65. In the graph,
AKl and Kg represent, respectively, the cost of capital under international and local capital structures; IRR
. represents the internal rate of return on investment projects; Il and Ig represent, respectively, the optimal
investment outlays under the alternative capital structures.
BKl and Kg represent, respectively, the cost of capital under local and international capital structures; IRR
. represents the internal rate of return on investment projects; Il and Ig represent the optimal investment
outlays under the alternative capital structures.
C. None of the above
66. Suppose that the firm's cost of capital can be reduced from Kl under the local capital structure to Kg under
an internationalized capital structure. The take-away lesson from the graph is that
A. The firm can then increase its profitable investment outlay from Il to Ig, contributing to the firm's
value.
BA reduced cost of capital increases the firm's value not only through increased investments in new
. projects but also through revaluation of the cash flows from existing projects.
CKl and Kg represent, respectively, the cost of capital under local and international capital structures; IRR
. represents the internal rate of return on investment projects; Il and Ig represent the optimal investment
outlays under the alternative capital structures.
D. All of the above
67. For a firm confronted with a fixed schedule of possible new investments, any policy that lowers the firm's
cost of capital will increase the profitable capital expenditures the firm takes on and increase the wealth
of the firm's shareholders. One such policy is
A. internationalizing the firm's capital budgeting opportunities.
B. internationalizing the firm's cost of capital.
C. investing in riskier projects financed with debt.
68. For most countries and most firms, the domestic country beta
A. can be no lower than its world beta.
B. is normally much smaller than the world beta.
C. is normally much much higher than the world beta.
D. is exactly equal to the world beta.
69.
Suppose the domestic U.S. beta of IBM is 1.0, that is

U.S. market portfolio is
and that the expected return on the
percent, and that the U.S. T-bill rate is 6 percent. If the world beta
measure of IBM is
then we can say
A That if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital
. would be 20% lower than if U.S. markets were segmented.
B That if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital
C That if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital
. would be one-third lower than if U.S. markets were segmented.
70. Studies suggest that international capital markets are not segmented anymore
A. and are therefore fully integrated.
B. but are not as yet fully integrated.
C. so cross-listing of shares will not lower a firm's cost of capital.
71. Compute the domestic country beta of Stansfield Bicycles as well as its world beta.
A.
B.
C.
D.
1.00 and 0.80 respectively

None of the above
72. Suppose that the British stock market is segmented from the rest of the world. Using the CAPM and a
risk-free rate of 5%, estimate the equity cost of capital for Stansfield.
A.
B.
C.
D.
14%
12%
9%
None of the above
73. Suppose that the British stock market is integrated with the rest of the world and Stansfield Company has
made its shares tradable internationally via cross-listing on the NYSE. Using the CAPM and a risk-free
rate of 5%, estimate the equity cost of capital for Stansfield.
A.
B.
C.
D.
12%
10.60%
6.60%
None of the above
74. Assume that XYZ Corporation is a leveraged company with the following information:
Kl = cost of equity capital for XYZ = 13%
A. 8%
B. 9%
C. 10%
D. 12%
75. Assume that XYZ Corporation is a leveraged company with the following information:
Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average cost of
capital of 9.3%.
A. 35%
B. 40%
C. 45%
D. 50%
76. Assume that the risk-free rate of return is 4%, and the expected return on the market portfolio is 10%.
If the systematic risk inherent in the stock of ABC Corporation is 1.80, using the Capital Asset Pricing
Model (CAPM) calculate the expected return of ABC.
A. 14.0%
B. 14.8%
C. 16.0%
D. 16.8%
77. In the real world, does the cost of capital differ among countries?
A. Yes
B. No
78. Recent studies suggest that agency costs of managerial discretion are lower in Japan than in the United
States. This suggests that
A.the cost of capital can be lower in Japan than the United States, but only if international financial
markets are not fully integrated.
B. the cost of capital can be lower in Japan than the United States, even if international financial markets
are fully integrated.
C. the cost of capital will be higher in Japan than the United States, even if international financial markets
are fully integrated.
79. The following is an outline of certain potential benefits as well as costs associated with the cross-border
listings of stocks:
(i) - the company can expand its potential investor base
(ii) - issues involving the disclosure and listing requirements
(iii) - creates a secondary market for the company's shares
(iv) - volatility spillover from the overseas markets
(v) - liquidity
(vi) - control of the company by foreigners
(vii) - enhances the visibility of the company's name and its products in foreign marketplaces
Which of the following represent all the potential benefits of the cross-border listings of stocks?
A. (i), (ii), and (iii)
B. (ii), (iv), and (vi)
C. i), (iii), (v), and (vii)
D. (iv), (v), (vi), and (vii)
80. The following is an outline of certain potential benefits as well as costs associated with the cross-border
listings of stocks:
(v) - liquidity
Which of the following represent all the potential costs of the cross-border listings of stocks?
C. (i), (iii), (v), and (vii)
81. A firm may cross-list its share to
A. establish a broader investor base for its stock.
B establish name recognition in foreign capital markets, thus paving the way for the firm to source new
. equity and debt capital from investors in different markets.
C. expose the firm's name to a broader investor and consumer groups.
D. all of the above
82. Companies domiciled in countries with weak investor protection can reduce agency costs between
shareholders and management
A. by moving to a better county.
B. by listing their stocks in countries with strong investor protection.
C. by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act.
D. having a press conference and promising to be nice to their investors.
83. Benetton, an Italian clothier, is listed on the New York Stock Exchange.
A. This decision provides their shareholders with a higher degree of protection than is available in Italy.
B. This decision can be a signal of the company's commitment to shareholder rights.
C This may make investors both in Italy and abroad more willing to provide capital and to increase the
. value of the pre-existing shares.
D. All of the above
84. In the real world, many firms that have cross-listed their shares on the U.S. markets have experienced a
reduction in the cost of capital. This effect was greater for
A. Australian firms than for Canadian firms.
B. United States firms than for Mexican firms.
C. bonds than for stocks.
85. To maximize the benefits of partial integration of capital markets
A. a country should choose to internationally cross-list those assets that are least correlated with the
domestic market portfolio.
B.a country should choose to internationally cross-list those assets that are most highly correlated with
the domestic market portfolio.
C. a country should choose to internationally cross-list those assets that are uncorrelated with the domestic
market portfolio.
86. One explanation for foreign equity ownership restrictions
A. is to make it difficult or impossible for foreigners to gain control of a domestic company.
B. is to expropriate wealth from domestic shareholders.
C. is the arguments in favor of free trade.
87. One likely effect of a company or government instituting foreign equity ownership restrictions is
A. a decrease in domestic stock prices.
B. an increase in domestic stock prices.
C. a transfer of wealth from international shareholders to domestic shareholders.
88. The Pricing-to-Market phenomenon
A. describes the potential effect of foreign equity ownership restrictions.
Bdescribes the premium or discount faced by foreign shareholders relative to domestic investors in the
. price of a stock due to legal restrictions imposed on foreign equity ownership.
C. was evidenced in the relative prices of Nestl shares prior to November 17, 1988.
D. all of the above
89. The Nestl episode shows
A. that political risk can exist in a country like Switzerland, long considered a haven from such risk.
B. the pricing to market phenomenon exists.
C. it is possible to expropriate wealth from one group of shareholders and transfer it to another group.
D. all of the above
90. The majority of publicly traded Swiss corporations have up to three classes of common stock:
1) Registered stock
2) Voting bearer stock
3) Nonvoting bearer stock
Until recently, foreigners were not allowed to buy registered stocks: in the case of Nestl this had the
effect of
A. distorting the prices of registered stock downward.
B. distorting the prices of registered stock upward.
C. this had no effect on prices.
91. With regard to the financial structure of a foreign subsidiary
A. Using local financing can reduce political risk.
BA MNC that finances a foreign investment with home-country equity faces greater risk of expropriation
. than if it had financed the investment with at least some local debt or equity.
C There may be advantages other than a reduction in political risk that encourage MNCs to finance
. foreign subsidiaries with local money.
D. All of the above
92. With regard to the financial structure of a foreign subsidiary
A. one option is to conform to the parent company's capital structure.
B. one option is to conform to the local norm of the country where the subsidiary operates.
C one option is to vary judiciously to capitalize on opportunities to lower taxes, reduce financing costs
. and risks, and take advantage of market imperfections.
D. all of the above
93. When the parent company fully responsible for the subsidiary's obligations,
A. the independent financial structure of the subsidiary is irrelevant.
B. potential creditors will examine the parent's overall financial condition, not the subsidiary's.
C. the independent financial subsidiary can have the same capital structure as the parent.
D. all of the above
94. A recent study of MNCs suggests that when a foreign subsidiary's obligations cannot be met with locally
generated revenues,
A. parent firms bail out their subsidiaries regardless of circumstances.
B. that parent firms routinely allow subsidiaries to default.
C. most subsidiaries are financed almost entirely with banker's acceptances.
95. When the choice of financing a foreign subsidiary is between external debt and equity financing
A. political risk considerations tend to favor the latter.
B. political risk considerations tend to favor the former.
C. political risk is separate from financial risk and so does not enter into a discussion of debt equity ratios.
96. When the choice of financing a foreign subsidiary is between external debt and equity financing
A. many host governments tolerate the repatriation of funds in the form of interest much better than
dividends.
B. debt financing is generally secured from the World Bank, but only in developed countries.
C. many host governments tolerate the repatriation of funds in the form of dividends much better than
interest.
97. The parent company should decide the financing method for its own subsidiaries
A. with a view toward minimizing the parent's overall cost of capital.
B. by copying the norms of the host country.
C. with a view toward gaming the bankruptcy system of the host country.
98. The required return on equity for a levered firm is 10.60%. The debt to equity ratio is the tax rate
is 40%, the pre-tax cost of debt is 8%. Find the cost of capital if this firm were financed entirely with
equity.
A. 10%
B. 12%
C. 8.67%
99. The required return on equity for an all-equity firm is 10.0%. They are considering a change in capital
structure to a debt-to-equity ratio of the tax rate is 40%, the pre-tax cost of debt is 8%. Find the new
cost of capital if this firm changes capital structure.
A. 14.93%
B. 8.67%
C. 7.40%
100.The required return on equity for an all-equity firm is 10.0%. They currently have a beta of one and the
risk-free rate is 5% and the market risk premium is 5%. They are considering a change in capital structure
to a debt-to-equity ratio of the tax rate is 40%, the pre-tax cost of debt is 8%. Find the beta if this firm
changes capital structure.
A. 1.12
B. 1
C. 7.4%
17 Key
1.
The cost of capital is

A. the minimum rate of return an investment project must generate in order to pay its financing costs.
B. the minimum rate of return an investment project must generate in order to pay its financing costs
plus a reasonable profit.
C. the maximum rate of return an investment project must generate in order to pay its financing costs.
D. the maximum rate of return an investment project must generate in order to pay its financing costs
plus a reasonable profit.
Eun - Chapter 17 #1
Topic: Cost of Capital
2.
For a firm that has both debt and equity in its capital structure, its financing cost can be represented by
the weighted average cost of capital that is computed by
A. weighing the pre-tax borrowing cost of the firm and the cost of equity capital, using the debt as the
weight.
B. weighing the after-tax borrowing cost of the firm and the cost of equity capital, using the debt as
the weight.
C.K = (1 - )K + (1 - )i
l
where:
K = weighted average cost of capital
Kl = cost of equity capital for a leveraged firm
i = before-tax borrowing cost
= marginal corporate income tax rate
= debt-to-total-market-value ratio
D. b and c
Eun - Chapter 17 #2
3.

Which of these are correct?
B. The tax rate is
D. All of the above
Eun - Chapter 17 #3
4.

A. The debt-to-total market value ratio is
B. The tax rate is i
D. All of the above
Eun - Chapter 17 #4
5.

B. The cost of equity capital for a levered firm is K
C. The pre-tax cost of debt capital is i
D. All of the above
Eun - Chapter 17 #5
6.

B. The cost of equity capital for a levered firm is Kl
D. All of the above
Eun - Chapter 17 #6
7.

A. The weighted average cost of capital for a levered firm is K
B. The tax rate is
D. All of the above
Eun - Chapter 17 #7
8.
At the optimal capital structure,

A. K = (1 - )K + (1 - )i will be minimized.
l
B. The debt-equity ratio will be equal to the debt-to-value ratio.

C. K = (1 - )K + (1 - )i will be maximized.
l
Eun - Chapter 17 #8
9.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
Eun - Chapter 17 #9
10.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
Eun - Chapter 17 #10
11.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
12.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
13.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
14.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
15.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
16.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
17.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
18.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
19.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
20.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
21.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
22.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
23.
A.
B.
C.
D.
E.
8.67%
8.00%
7.60%
7.33%
7.14%
24.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
25.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
26.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
27.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
28.
A.
B.
C.
D.
E.
7.00%
6.89%
6.73%
6.67%
6.57%
29.
Find the debt-to-value ratio for a firm with a debt-to-equity ratio of .

A.
B.
C. 3/5
D.
E. 5/7
30.
Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1.

A.
B.
C. 3/5
D.
E. 5/7
31.

A.
B.
C. 3/5
D.
E. 5/7
32.

A.
B.
C. 3/5
D.
E. 5/7
33.

A.
B.
C. 3/5
D.
E. 5/7
34.

A.
B.
C. 3/5
D.
E. 5/7
35.

A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
36.

A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
37.

A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
38.
Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4 .

A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
39.

A. 3/4
B. 7/9
C. 4/5
D. 9/11
E. 5/6
40.
Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of .

A. 1
B. 2
C. 3
D. 4
E. 5
41.

A. 1
B. 2
C. 3
D. 4
E. 5
42.
43.
44.

A. 1
B. 2
C. 3
D. 4
E. 5
Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 4/5.
A. 1
B. 2
C. 3
D. 4
E. 5
Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of 5/6.
A. 1
B. 2
C. 3
D. 4
E. 5



45.
Corporations are becoming multinational not only in the scope of their business activities but also in
their capital structure
A. by raising funds from domestic as well as government sources.
B. by raising funds from foreign as well as domestic sources.
Cthis trend reflects not only a conscious effort on the part of firms to raise the cost of capital by
. international sourcing of funds but also the ongoing liberalization and deregulation of international
financial markets that make them accessible for many firms.
D. both b and c
46.
Find the weighted average cost of capital for a firm that has a debt-to-equity ratio of 1, a tax rate of
A. 9.6%
B. 7.968%
C. 14%
47.
A. 9.6%
B. 7.968%
C. 8.76%
48.
A. 7.6%
B. 7.968%
C. 10%
49.
A. 7.6%
B. 7.968%
C. 10%
50.
The cost of equity capital is

A. the expected return on the firm's stock that investors require.
B. frequently estimated by using the Capital Asset Pricing Model (CAPM).
C. generally considered to be a linear function of the systematic risk inherent in the security.
D. all of the above
51.
A reduced cost of equity capital increases the firm's value

A. through revaluation of the firm's existing cash flows from existing projects.
B. through increased investment as more projects become positive NPVs.
C. both a and b
52.
A value-maximizing firm's would

A. undertake an investment project as long as the IRR exceeds the NPV.
B. undertake an investment project as long as the IRR is less than the cost of capital.
C. undertake an investment project as long as the IRR exceeds the cost of capital.
53.
Using the notation of the text, the CAPM states:

A.
B.
C.
54.
The common stock of Kansas City Power and Light has a beta of 0.80. The Treasury bill rate is 4
percent and the market risk premium is 8 percent. KCP&L is in the 34% tax bracket. What is their cost
of equity capital?
A. 12.0%
B. 10.4%
C. 7.20%
D. 6.4%
E. 8.22%
55.
The market risk premium

A. can be defined by the difference between the expected market return and the risk-free rate.
B. is the reward for bearing nondiversifiable risk.
C. is the slope of the security market line.
D.
E. all of the above are correct
56.
Compute the debt-to-equity ratio for a firm that has a debt-to-value ratio of 60%.
A. 1/3
B. 2/5
C. 3/2
D. 2/3
57.
Compute the debt-to-total-value ratio for a firm that has a debt-to-equity ratio of 2.
A. 1/3
B. 2/5
C. 3/2
D. 2/3
58.
Micro Spinoffs, Inc., issued 20-year debt one year ago today at par value with a coupon rate of 9
percent, paid annually. Today, the debt is selling at $1,050. If the firm's tax rate is 34%, what is its
after-tax cost of debt?
A. 9%
B. 8.46%
C. 5.94%
D. 5.58%
59.
The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 4; the
risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%. What
is the firm's cost of equity capital?
A. 33.33%
B. 10.85%
C. 13.12%
D. 16.50%
60.
Systematic risk refers to

A. the diversifiable (company specific) risk of an asset.
B. the nondiversifiable (market) risk of an asset.
C. economic and political risk.
D. the risk that can be hedged.
61.
The firm's tax rate is 34%. The firm's pre-tax cost of debt is 8%; the firm's debt-to-equity ratio is 4;
the risk-free rate is 3%; the beta of the firm's common stock is 1.5; the market risk premium is 9%.
Calculate the weighted average cost of capital.
A. 33.33%
B. 8.09%
C. 9.02%
D. 16.5%
62.
The formula for beta is:

A.
B.
C.
D.

63.
In the Capital Asset Pricing Model (CAPM), the term Beta, , is

A. a measure of systematic risk inherent in a security.
B calculated as the "covariance of future returns between a specific security and the market portfolio"
. divided by the "variance of returns of the market portfolio".
C. both a and b
Topic: Cost of Capital in Segmented versus Integrated Markets
64.
Assume that XYZ Corporation is a levered company with the following information:
Kl = cost of levered equity capital for XYZ = 13%
A. 8%
B. 9%
C. 10%
D. 12%
65.
In the graph,
AKl and Kg represent, respectively, the cost of capital under international and local capital structures;
. IRR represents the internal rate of return on investment projects; Il and Ig represent, respectively, the
optimal investment outlays under the alternative capital structures.
BKl and Kg represent, respectively, the cost of capital under local and international capital structures;
. IRR represents the internal rate of return on investment projects; Il and Ig represent the optimal
66.
Suppose that the firm's cost of capital can be reduced from Kl under the local capital structure to Kg
under an internationalized capital structure. The take-away lesson from the graph is that
A. The firm can then increase its profitable investment outlay from Il to Ig, contributing to the firm's
value.
B A reduced cost of capital increases the firm's value not only through increased investments in new
. projects but also through revaluation of the cash flows from existing projects.
CKl and Kg represent, respectively, the cost of capital under local and international capital structures;
. IRR represents the internal rate of return on investment projects; Il and Ig represent the optimal
D. All of the above
67.
For a firm confronted with a fixed schedule of possible new investments, any policy that lowers the
firm's cost of capital will increase the profitable capital expenditures the firm takes on and increase the
wealth of the firm's shareholders. One such policy is
A. internationalizing the firm's capital budgeting opportunities.
B. internationalizing the firm's cost of capital.
C. investing in riskier projects financed with debt.
68.
For most countries and most firms, the domestic country beta
A. can be no lower than its world beta.
B. is normally much smaller than the world beta.
C. is normally much much higher than the world beta.
D. is exactly equal to the world beta.
69.
Suppose the domestic U.S. beta of IBM is 1.0, that is

U.S. market portfolio is
and that the expected return on the
percent, and that the U.S. T-bill rate is 6 percent. If the world beta
measure of IBM is
then we can say
A That if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital
B That if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital
C That if the U.S. markets are fully integrated with the rest of the world, IBM's cost of equity capital
. would be one-third lower than if U.S. markets were segmented.
70.
Studies suggest that international capital markets are not segmented anymore
A. and are therefore fully integrated.
B. but are not as yet fully integrated.
C. so cross-listing of shares will not lower a firm's cost of capital.
71.
Compute the domestic country beta of Stansfield Bicycles as well as its world beta.
A.
B.
C.
D.

None of the above
72.
Suppose that the British stock market is segmented from the rest of the world. Using the CAPM and a
A.
B.
C.
D.
14%
12%
9%
None of the above
73.
Suppose that the British stock market is integrated with the rest of the world and Stansfield Company
has made its shares tradable internationally via cross-listing on the NYSE. Using the CAPM and a
A.
B.
C.
D.
12%
10.60%
6.60%
None of the above
74.
Assume that XYZ Corporation is a leveraged company with the following information:
A. 8%
B. 9%
C. 10%
D. 12%
75.
Assume that XYZ Corporation is a leveraged company with the following information:
Calculate the debt-to-total-market-value ratio that would result in XYZ having a weighted average
cost of capital of 9.3%.
A. 35%
B. 40%
C. 45%
D. 50%
76.
Assume that the risk-free rate of return is 4%, and the expected return on the market portfolio is 10%.
If the systematic risk inherent in the stock of ABC Corporation is 1.80, using the Capital Asset Pricing
Model (CAPM) calculate the expected return of ABC.
A. 14.0%
B. 14.8%
C. 16.0%
D. 16.8%
77.
In the real world, does the cost of capital differ among countries?
A. Yes
B. No
Topic: Does the Cost of Capital Differ among Countries?
78.
Recent studies suggest that agency costs of managerial discretion are lower in Japan than in the United
States. This suggests that
A.the cost of capital can be lower in Japan than the United States, but only if international financial
markets are not fully integrated.
B. the cost of capital can be lower in Japan than the United States, even if international financial
markets are fully integrated.
C. the cost of capital will be higher in Japan than the United States, even if international financial
markets are fully integrated.
79.
The following is an outline of certain potential benefits as well as costs associated with the crossborder listings of stocks:
(v) - liquidity
Which of the following represent all the potential benefits of the cross-border listings of stocks?
C. i), (iii), (v), and (vii)
Topic: CASE APPLICATION: Novo Industri
Topic: Cross-Border Listings of Stocks
Topic: International Finance in Practice: The U.S. Welcomes the Alien Invasion
80.
The following is an outline of certain potential benefits as well as costs associated with the crossborder listings of stocks:
(v) - liquidity
Which of the following represent all the potential costs of the cross-border listings of stocks?
C. (i), (iii), (v), and (vii)
81.
A firm may cross-list its share to

A. establish a broader investor base for its stock.
B establish name recognition in foreign capital markets, thus paving the way for the firm to source
. new equity and debt capital from investors in different markets.
C. expose the firm's name to a broader investor and consumer groups.
D. all of the above
Topic: Capital Asset Pricing under Cross-Listings
82.
Companies domiciled in countries with weak investor protection can reduce agency costs between
shareholders and management
A. by moving to a better county.
B. by listing their stocks in countries with strong investor protection.
C. by voluntarily complying with the provisions of the U.S. Sarbanes-Oxley Act.
D. having a press conference and promising to be nice to their investors.
83.
Benetton, an Italian clothier, is listed on the New York Stock Exchange.

A. This decision provides their shareholders with a higher degree of protection than is available in
Italy.
B. This decision can be a signal of the company's commitment to shareholder rights.
C. This may make investors both in Italy and abroad more willing to provide capital and to increase
the value of the pre-existing shares.
D. All of the above
84.
In the real world, many firms that have cross-listed their shares on the U.S. markets have experienced
a reduction in the cost of capital. This effect was greater for
A. Australian firms than for Canadian firms.
B. United States firms than for Mexican firms.
C. bonds than for stocks.
85.
To maximize the benefits of partial integration of capital markets

A. a country should choose to internationally cross-list those assets that are least correlated with the
a
B. country should choose to internationally cross-list those assets that are most highly correlated with
the domestic market portfolio.
C. a country should choose to internationally cross-list those assets that are uncorrelated with the
86.
One explanation for foreign equity ownership restrictions

A. is to make it difficult or impossible for foreigners to gain control of a domestic company.
B. is to expropriate wealth from domestic shareholders.
C. is the arguments in favor of free trade.
Topic: The Effect of Foreign Equity Ownership Restrictions
87.
One likely effect of a company or government instituting foreign equity ownership restrictions is
A. a decrease in domestic stock prices.
B. an increase in domestic stock prices.
C. a transfer of wealth from international shareholders to domestic shareholders.
88.
The Pricing-to-Market phenomenon

A. describes the potential effect of foreign equity ownership restrictions.
B describes the premium or discount faced by foreign shareholders relative to domestic investors in the
. price of a stock due to legal restrictions imposed on foreign equity ownership.
C. was evidenced in the relative prices of Nestl shares prior to November 17, 1988.
D. all of the above
Topic: Pricing-to-Market Phenomenon
89.
The Nestl episode shows

A. that political risk can exist in a country like Switzerland, long considered a haven from such risk.
B. the pricing to market phenomenon exists.
C. it is possible to expropriate wealth from one group of shareholders and transfer it to another group.
D. all of the above
Topic: CASE APPLICATION: Nestle
90.
The majority of publicly traded Swiss corporations have up to three classes of common stock:
1) Registered stock
2) Voting bearer stock
3) Nonvoting bearer stock
Until recently, foreigners were not allowed to buy registered stocks: in the case of Nestl this had the
effect of
A. distorting the prices of registered stock downward.
B. distorting the prices of registered stock upward.
C. this had no effect on prices.
91.
With regard to the financial structure of a foreign subsidiary

A. Using local financing can reduce political risk.
B A MNC that finances a foreign investment with home-country equity faces greater risk of
. expropriation than if it had financed the investment with at least some local debt or equity.
C. There may be advantages other than a reduction in political risk that encourage MNCs to finance
foreign subsidiaries with local money.
D. All of the above
Topic: The Financial Structure of Subsidiaries
92.
With regard to the financial structure of a foreign subsidiary

A. one option is to conform to the parent company's capital structure.
B. one option is to conform to the local norm of the country where the subsidiary operates.
C one option is to vary judiciously to capitalize on opportunities to lower taxes, reduce financing costs
. and risks, and take advantage of market imperfections.
D. all of the above
93.
When the parent company fully responsible for the subsidiary's obligations,
A. the independent financial structure of the subsidiary is irrelevant.
B. potential creditors will examine the parent's overall financial condition, not the subsidiary's.
C. the independent financial subsidiary can have the same capital structure as the parent.
D. all of the above
94.
A recent study of MNCs suggests that when a foreign subsidiary's obligations cannot be met with
locally generated revenues,
A. parent firms bail out their subsidiaries regardless of circumstances.
B. that parent firms routinely allow subsidiaries to default.
C. most subsidiaries are financed almost entirely with banker's acceptances.
95.
When the choice of financing a foreign subsidiary is between external debt and equity financing
A. political risk considerations tend to favor the latter.
B. political risk considerations tend to favor the former.
C. political risk is separate from financial risk and so does not enter into a discussion of debt equity
ratios.
96.
When the choice of financing a foreign subsidiary is between external debt and equity financing
A. many host governments tolerate the repatriation of funds in the form of interest much better than
dividends.
B. debt financing is generally secured from the World Bank, but only in developed countries.
C. many host governments tolerate the repatriation of funds in the form of dividends much better than
interest.
97.
The parent company should decide the financing method for its own subsidiaries
A. with a view toward minimizing the parent's overall cost of capital.
B. by copying the norms of the host country.
C. with a view toward gaming the bankruptcy system of the host country.
98.
The required return on equity for a levered firm is 10.60%. The debt to equity ratio is the tax rate
is 40%, the pre-tax cost of debt is 8%. Find the cost of capital if this firm were financed entirely with
equity.
A. 10%
B. 12%
C. 8.67%
99.
The required return on equity for an all-equity firm is 10.0%. They are considering a change in capital
structure to a debt-to-equity ratio of the tax rate is 40%, the pre-tax cost of debt is 8%. Find the new
cost of capital if this firm changes capital structure.
A. 14.93%
B. 8.67%
C. 7.40%
100.
The required return on equity for an all-equity firm is 10.0%. They currently have a beta of one and
the risk-free rate is 5% and the market risk premium is 5%. They are considering a change in capital
structure to a debt-to-equity ratio of the tax rate is 40%, the pre-tax cost of debt is 8%. Find the beta
if this firm changes capital structure.
A. 1.12
B. 1
C. 7.4%
17 Summary
Category
Eun - Chapter 17
Topic: Pricing-to-Market Phenomenon
# of Questions
100
5
2
2
62
14
2
2
2
1
2
10

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17

The cost of capital is

In the notation of the book, K = (1 - )Kl + (1 - )i

In the notation of the book, K = (1 - )Kl + (1 - )i

In the notation of the book, K = (1 - )Kl + (1 - )i

In the notation of the book, K = (1 - )Kl + (1 - )i

In the notation of the book, K = (1 - )Kl + (1 - )i

At the optimal capital structure,

B. The debt-equity ratio will be equal to the debt-to-value ratio.

Solve for the weighted average cost of capital:

12. Solve for the weighted average cost of capital:

17. Solve for the weighted average cost of capital:

22. Solve for the weighted average cost of capital:

27. Solve for the weighted average cost of capital:

Suppose the domestic U.S. beta of IBM is 1.0, that is

and that the expected return on the

1.00 and 0.80 respectively

The cost of capital is

In the notation of the book, K = (1 - )Kl + (1 - )i

In the notation of the book, K = (1 - )Kl + (1 - )i

In the notation of the book, K = (1 - )Kl + (1 - )i

In the notation of the book, K = (1 - )Kl + (1 - )i

In the notation of the book, K = (1 - )Kl + (1 - )i

At the optimal capital structure,

B. The debt-equity ratio will be equal to the debt-to-value ratio.

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Solve for the weighted average cost of capital:

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of .

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 1.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 2.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 2.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 2.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 3.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4.

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 4 .

Find the debt-to-value ratio for a firm with a debt-to-equity ratio of 5.

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of .

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of .

Find the debt-to-equity ratio for a firm with a debt-to-total-value ratio of .

Eun - Chapter 17 #42

Eun - Chapter 17 #43

Eun - Chapter 17 #44

The cost of equity capital is