Study Guide: Corporate Finance 
Chapter 14
Cost of Capital
Multiple Choice Questions 1. A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called?
A. dividend yield
B. cost of equity
C. capital gains yield
D. cost of capital
E. income return 2. Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the:
A. compound rate.
B. current yield.
C. cost of debt.
D. capital gains yield.
E. cost of capital. 3. The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:
A. reward to risk ratio.
B. weighted capital gains rate.
C. structured cost of capital.
D. subjective cost of capital.
E. weighted average cost of capital. 4. When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach.
A. subjective risk
B. pure play
C. divisional cost of capital
D. capital adjustment
E. security market line 5. A firm's cost of capital:
A. will decrease as the risk level of the firm increases.
B. for a specific project is primarily dependent upon the source of the funds used for the project.
C. is independent of the firm's capital structure.
D. should be applied as the discount rate for any project considered by the firm.
E. depends upon how the funds raised are going to be spent. 6. The weighted average cost of capital for a wholesaler:
A. is equivalent to the aftertax cost of the firm's liabilities.
B. should be used as the required return when analyzing a potential acquisition of a retail outlet.
C. is the return investors require on the total assets of the firm.
D. remains constant when the debt-equity ratio changes.
E. is unaffected by changes in corporate tax rates. 7. Which one of the following is the
Cost of Capital
Multiple Choice Questions 1. A group of individuals got together and purchased all of the outstanding shares of common stock of DL Smith, Inc. What is the return that these individuals require on this investment called?
A. dividend yield
B. cost of equity
C. capital gains yield
D. cost of capital
E. income return 2. Textile Mills borrows money at a rate of 13.5 percent. This interest rate is referred to as the:
A. compound rate.
B. current yield.
C. cost of debt.
D. capital gains yield.
E. cost of capital. 3. The average of a firm's cost of equity and aftertax cost of debt that is weighted based on the firm's capital structure is called the:
A. reward to risk ratio.
B. weighted capital gains rate.
C. structured cost of capital.
D. subjective cost of capital.
E. weighted average cost of capital. 4. When a manager develops a cost of capital for a specific project based on the cost of capital for another firm which has a similar line of business as the project, the manager is utilizing the _____ approach.
A. subjective risk
B. pure play
C. divisional cost of capital
D. capital adjustment
E. security market line 5. A firm's cost of capital:
A. will decrease as the risk level of the firm increases.
B. for a specific project is primarily dependent upon the source of the funds used for the project.
C. is independent of the firm's capital structure.
D. should be applied as the discount rate for any project considered by the firm.
E. depends upon how the funds raised are going to be spent. 6. The weighted average cost of capital for a wholesaler:
A. is equivalent to the aftertax cost of the firm's liabilities.
B. should be used as the required return when analyzing a potential acquisition of a retail outlet.
C. is the return investors require on the total assets of the firm.
D. remains constant when the debt-equity ratio changes.
E. is unaffected by changes in corporate tax rates. 7. Which one of the following is the