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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.