Question 1
1. The cost of capital is a combination of a firm’s payments to the different sources of capital funding. We call this
a.
the average cost of capital.
b.
the weighted average cost of capital.
c.
the transfer price.
d.
the discount rate.
1 points
Question 2
1. The cost of capital for a firm is
a.
the price of productive inputs that the firm pays.
b.
the interest rate on borrowed funds and returns for equity.
c.
is a sunk cost.
d.
determined by profits.
1 points
Question 3
1. Stocks are a
a.
form of debt.
b.
form of debt and equity.
c.
form of equity.
d.
just a way for firms to borrow money.
1 points
Question 4
1. Bonds generally
a.
have lower value on secondary markets.
b.
have more risk than stock.
c.
have less risk than stock.
d.
pay a fixed proportion of profits.
1 points
Question 5
1. The price of a bond and the market interest rate (the discount rate)
a.
are inversely related
b.
are directly related.
c.
are linked by the capital asset pricing model.
d.
are positively related.
1 points
Question 6
1. Capital structure refers to
a.
the ratio of equity to debt.
b.
the ratio of common stock to preferred stock.
c.
the ratio of cash to current liabilities
d.
the ratio of debt to equity.
1 points
Question 7
1. The cost of equity capital to a firm is equal to
a.
a risk-free interest rate.
b.
the Treasury bill rate minus an equity premium.
c.
the dividend payments.
d.
a risk-free rate plus an equity premium.
1 points
Question 8
1. You should invest in a new project if
a.
the present value of all costs is negative.
b.
the NPV is positive.
c.
the expected revenues are positive.
d.
none of these choices.
1 points
Question 9
1. If the discount rate increases
a.
investment also increases.
b.
NPV does not change.
c.
NPV falls.
d.
NPV rises.
1 points
Question 10
1. NPV calculation needs to include
a.
only variable costs of a project.
b.
all costs related to a project.
c.
only sunk costs of a project.
d.
a risk-free rate as the discount rate.
1 points
Question 11
1. The corporate form of business allows owners a more efficient way to manage risk relative to
a.
proprietorships.
b.
partnerships.
c.
other non-corporate forms of business.
d.
all of these choices.
1 points
Question 12
1. Stockholders manage risk by
a.
electing the board of directors.
b.
having lots of bonds in their portfolios.
c.
appointing day-to-day managers.
d.
diversifying their portfolios.
1 points
Question 13
1. The market process can be thought of as
a.
a path to discovery of information.
b.
an inflexible process.
c.
a theoretical concept that reveals little useful information.
d.
none of these choices.
1 points
Question 14
1. In general, the structure of a business firm
a.
seems more like a central planning agency than a market.
b.
looks like a flat network.
c.
is largely determined by legal considerations.
d.
looks like a market.
1 points
Question 15
1. Internal markets
a.
are used to determine a transfer price between different units and activity centers.
b.
are most commonly relegated to cafeteria services and vending.
c.
are part of a firm’s horizontal network.
d.
none of these choices.
1 points
Question 16
1. Transfer prices should be set to so
a.
to maximize profits for only one unit in a multi-unit firm.
b.
allow arbitrage with the external market place.
c.
to maximize profits for the overall firm.
d.
none of these choices.
1 points
Question 17
1. BP has
a.
only used external markets.
b.
used internal markets successfully to reduce emissions.
c.
used internal markets to replace vendor relationships.
d.
none of these choices.
1 points
Question 18
1. Market prices
a.
are limited in their information content.
b.
contain all available information.
c.
contain only past information.
d.
none of these choices.
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