Cost of Capital – Financial Management MCQ

Cost of Capital – CS Executive Financial and Strategic Management MCQ Questions with Answers you can quickly revise the concepts.

Cost of Capital – Financial Management MCQ

Question 1.
The cost of equity share or debt is called –
(A) Related cost of capital
(B) Easy to calculate cost of capital
(C) Specific cost of capital
(D) Burden on the shareholder
Answer:
(C) Specific cost of capital

Question 2.
In which of the following method cost of equity capital is computed by dividing the dividend by market price per share or net proceeds per share?
(A) Price Earning Method
(B) Adjusted Price Method
(C) Adjusted Dividend Method
(D) Dividend Yield Method
Answer:
(D) Dividend Yield Method

Question 3.
In weighted average cost of capital, a company can affect its capital cost through –
1. Policy of capital structure
2. Policy of dividends
3. Policy of investment
Select the correct answer from the options given below:
(A) 1 only
(B) 2 & 3
(C) 1 & 3
(D) All 1, 2 & 3
Answer:
(D) All 1, 2 & 3

Question 4.
Which of the following is correct formula to calculate cost of equity under dividend yield method?
Cost of Capital – Financial Management MCQ 1
Cost of Capital – Financial Management MCQ 2
Answer:
(A)

Question 5.
……….. is the rate of return associated with the best investment opportunity for the firm and its shareholders that will be forgone if the projects presently under consideration by the firm were accepted.
(A) Explicit Cost
(B) Future Cost
(C) Implicit Cost
(D) Specific Cost
Answer:
(C) Implicit Cost

Question 6.
Cost of capital is equal to required return rate on equity in case if investors are only –
(A) Valuation Manager
(B) Common Stockholders
(C) Asset Seller
(D) Equity Dealer
Answer:
(B) Common Stockholders

Question 7.
Which of the following model/method makes use of beta (5) in calculation of cost of equity?
(A) Risk Adjusted Discount Model
(B) Capital Assets Pricing Method
(C) MM Model
(D) Price Earning Method
Answer:
(B) Capital Assets Pricing Method

Question 8.
Marginal cost –
(A) is the weighted average cost of new finance raised by the company.
(B) is the additional cost of capital when the company goes for further raising of finance.
(C) is the cost of raising an additional rupee of capital.
(D) All of the above
Answer:
(D) All of the above

Question 9.
Bond risk premium is added in to bond yield to calculate –
(A) Cost of option
(B) Cost of common stock
(C) Cost of preferred stock
(D) Cost of working capital
Answer:
(B) Cost of common stock

Question 10.
The cost of equity share or debt is called specific cost of capital. When specific costs are combined, then we arrive at –
(A) Maximum rate of return
(B) Internal rate of return
(C) Overall cost of capital
(D) Accounting rate of return
Answer:
(C) Overall cost of capital

Question 11.
Statement I:
Where earnings, dividends and equity share price all grow at the same rate, the cost of equity capital may be computed by dividend growth method.
Statement II:
When risk free rate is added to the market rate of return risk premium for the stock is arrived.
Select the correct answer from the options given below:
(A) Statement I is false but Statement II is true
(B) Both Statement I and Statement II are false
(C) Statement II is false but Statement I is true
(D) Both Statement I and Statement II are true
Answer:
(C) Statement II is false but Statement I is true

Question 12.
Interest rates, tax rates and market risk premium are factors which –
(A) Industry cannot control
(B) Industry can control
(C) Firm must control
(D) Firm cannot control
Answer:
(D) Firm cannot control

Question 13.
Assertion (A):
Cost of share capital would be based upon the expected rate of earnings of a company.
Reason (R):
Each investor expects a certain amount of earnings, whether distributed or not from the company in whose shares he invests.
Select the correct answer from the options given below:
(A) A is true but R is false
(B) A is false but R is true
(C) A and R both are true but R is not correct explanation of A
(D) A and R both are true and R is correct explanation of A
Answer:
(D) A and R both are true and R is correct explanation of A

Question 14.
If we deduct ‘risk free return’ from ‘market return’ and multiply it with ‘beta factor’ and again add ‘risk free return’, the resultant figure will be –
(A) Nil
(B) Risk premium
(C) Cost of equity
(D) WACC of the firm
Answer:
(C) Cost of equity

Question 15.
For each component of capital, a required rate of return is considered as:
(A) Component cost
(B) Evaluating cost
(C) Asset cost
(D) Asset depreciation value
Answer:
(A) Component cost

Question 16.
…….. is the rate that the firm pays to procure financing.
(A) Average Cost of Capital
(B) Combine Cost
(C) Economic Cost
(D) Explicit Cost
Answer:
(D) Explicit Cost

Question 17.
Which of the following method of cost of equity is similar to the dividend price approach?
(A) Discounted cash flow (DCF) method
(B) Capital asset pricing model
(C) Price earning method
(D) After tax equity method
Answer:
(C) Price earning method

Question 18.
Preferred dividend is divided by preferred stock price multiply by (1 – floatation cost) is used to calculate –
(A) Transaction cost of preferred stock
(B) Financing of preferred stock
(C) Weighted cost of capital
(D) Component cost of preferred stock
Answer:
(D) Component cost of preferred stock

Question 19.
Statement I:
Cost of retained earnings is the opportunity : cost of dividends foregone by shareholders.
Statement II:
The opportunity cost of reserve & surplus may be considered as their cost, which is equivalent to the income that would otherwise earn by placing these funds in alternative investment.
Select the correct answer from the options, given below:
(A) Statement I is false but Statement II is true
(B) Both Statement I and Statement II are false
(C) Statement II is false but Statement I is true
(D) Both Statement I and Statement II are true
Answer:
(D) Both Statement I and Statement II are true

Question 20.
How you will calculate expected dividend i e. dividend at the end of year one?
(A) D1 = [D0(1 + g)]
(B) D1 = [D0(1 -t)]
(C) D1 = [D0× (1 – g)]
(D) D1 = [D0 +(1 – g)](1 -t)
Answer:
(A) D1 = [D0(1 + g)]

Question 21.
In weighted average cost of capital, rising in interest rate leads to –
(A) Increase in cost of debt
(B) Increase the capital structure
(C) Decrease in cost of debt
(D) Decrease the capital structure
Answer:
(A) Increase in cost of debt

Question 22.
………… is the cost which has already been incurred for financing a particular project
(A) Future Cost
(B) Historical Cost
(C) Implicit Cost
(D) Opportunity Cost
Answer:
(B) Historical Cost

Question 23.
In weighted average cost of capital, capital components are funds that are usually offered by:
(A) Stock market
(B) Investors
(C) Capitalist
(D) Exchange index
Answer:
(B) Investors

Question 24.
Overall cost of capital is called as –
(A) Composite cost of capital
(B) Combined cost of capital
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 25.
Premium which is considered as difference of expected return on common stock and current yield on Treasury bonds is called –
(A) Past risk premium
(B) Expected premium
(C) Current risk premium
(D) Beta premium
Answer:
(C) Current risk premium

Question 26.
Which of the following figure is irrelevant while calculating cost of redeemable preference shares?
(A) Floatation cost
(B) Discount
(C) EPS
(D) Net proceeds
Answer:
(C) EPS

Question 27.
Select which of the following statement is correct?
(I) Capital budget decision largely depends on the cost of capital of each source.
(II) Capital structure is the mix or proportion of the different kinds of short term securities.
Cost of capital helps to evaluate the financial performance of the firm.
(IV) As per MM approach, the cost of equity (Ke) is equal to capitalization rate of pure equity stream minus a premium for business risk.
Select the correct answer from the options given below:
(A) (I) and (II)
(B) (I), (III) and (IV)
(C) (D) and (III)
(D) (I) and (III)
Answer:
(D) (I) and (III)

Question 28.
An interest rate which is paid by firm as soon as it issues debt is classified as pre-tax –
(A) Term structure
(B) Market premium
(C) Risk premium
(D) Cost of debt
Answer:
(D) Cost of debt

Question 29.
Which of the following is controllable factor affecting the cost of capital of the firm?
(A) Dividend policy
(B) Level of interest rates
(C) Tax rates
(D) All of the above
Answer:
(A) Dividend policy

Question 30.
Which of the following is uncontrollable factor affecting the cost of capital of the firm?
(A) Investment Policy
(B) Capital Structure Policy
(C) Debt service charges
(D) None of the above
Answer:
(D) None of the above

Question 31.
Type of cost which is used to raise common equity by reinvesting internal earnings is classified as………
(A) Cost of common equity
(B) Cost of mortgage
(C) Cost of stocks
(D) Cost of reserve assets
Answer:
(A) Cost of common equity

Question 32.
Which of the following is correct formula to calculate cost of irredeemable preference shares?
(A) Preference dividend ÷ Net proceeds
(B) Preference dividend × (1 -t)
(C) [Preference dividend × (1 -t)] ÷ Net proceeds
(D) [Preference dividend -n Net proceeds] × (1-t)
Answer:
(A) Preference dividend ÷ Net proceeds

Question 33.
Which of the following factor affects the determination of cost of capital of the firm?
(A) General economic conditions
(B) Market conditions
(C) Operating and financing decisions
(D) All of the above
Answer:
(D) All of the above

Question 34.
Cost of equity which is raised by reinvesting earnings internally must be higher than the –
(A) Cost of initial offering
(B) Cost of new common equity
(C) Cost of preferred equity
(D) Cost of floatation
Answer:
(B) Cost of new common equity

Question 35.
During planning period, marginal cost to raise a new debt is classified as –
(A) Debt cost
(B) Borrowing cost
(C) Relevant cost
(D) Embedded cost
Answer:
(C) Relevant cost

Question 36.
After tax cost of debentures not redeemable during the life time of the company is –
(A) [Interest -5- Net proceeds] × (1 -t)
(B) Interest × (1 -t) ÷ Net proceeds
(C) Interest × (1 +t) ÷ Net proceeds
(D) [Interest ÷ Net proceeds] × (1 +t)
Answer:
(B) Interest × (1 -t) ÷ Net proceeds

Question 37.
Risk free rate is subtracted from expected market return is considered as:
(A) Country risk
(B) Diversifiable risk
(C) Equity risk premium
(D) Market risk premium
Answer:
(C) Equity risk premium

Question 38.
A firm’s overall cost of capital:
(A) varies inversely with its cost of debt.
(B) is unaffected by changes in the tax rate.
(C) is another term for the firm’s internal rate of return.
(D) is the required return on the total assets of a firm.
Answer:
(D) is the required return on the total assets of a firm.

Question 39.
Key sources of value (earning an excess return) for a company can be attributed primarily to
(A) competitive advantage and access to capital
(B) quality management and industry attractiveness
(C) access to capital and quality management
(D) industry attractiveness and competitive advantage
Answer:
(D) industry attractiveness and competitive advantage

Question 40.
Which of the following is correct formula to calculate cost of redeemable debentures?
Cost of Capital – Financial Management MCQ 3
Answer:
(D)

Question 41.
The weighted average cost of capital (K0) results from a weighted average of the firm’s debt and equity capital costs. At a debt ratio of zero, the fin a is 100% equity financed. As debt is substituted for equity and as the debt ratio increases, the –
(A) K0 declines because the after-tax debt cost is less than the equity cost (Kd < Ke).
(B) K0 increases because the after-tax debt cost is less than the equity cost (Kd<Ke).
(C) K0 do not show any change and tend to remain same.
(D) None of the above
Answer:
(A) K0 declines because the after-tax debt cost is less than the equity cost (Kd < Ke).

Question 42.
The overall (weighted average) cost of capital is composed of a weighted average of
(A) the cost of common equity and the cost of debt
(B) the cost of common equity and the cost of preferred stock
(C) the cost of preferred stock and the cost of debt
(D) the cost of common equity, the cost of preferred stock, and the cost of debt
Answer:
(D) the cost of common equity, the cost of preferred stock, and the cost of debt

Question 43.
While calculating the WACC, cost of each component of the capital is weighted –
(A) In the ratio of 1:2:3:4
(B) by the relative proportion of that type of funds in the capital structure.
(C) by the relative proportion of that type of funds to total assets in the company
(D) Both (A) and (C)
Answer:
(B) by the relative proportion of that type of funds in the capital structure.

Question 44.
Which of the following formula you will use while calculating value of the firm?
(A) NOPAT ÷ K
(B) NOPAT × K0
(C) NOPAT ÷K0(1-t)
(D) None of the above
Answer:
(A) NOPAT ÷ K

Question 45.
For which of the following costs is it generally necessary to apply a tax adjustment to a yield measure?
(A) Cost of debt
(B) Cost of preferred stock
(C) Cost of common equity
(D) Cost of retained earnings
Answer:
(A) Cost of debt

Question 46.
The cost of preference share capital is calculated –
(A) by dividing the fixed dividend per share by the price per preference share and then adding risk premium.
(B) by dividing the fixed dividend per share by the price per preference share and then adding growth rate.
(C) by dividing the fixed dividend per share by the price per preference share.
(D) by dividing the fixed dividend per share by the book value per preference share.
Answer:
(C) by dividing the fixed dividend per share by the price per preference share.

Question 47.
Statement I:
Cost of equity capital is the rate of return which equates the present value of expected dividends with the market share price.
Statement II:
Dividend Yield Method cannot be used to calculate cost of equity of units suffering losses.
Select correct answer from the options given below:
(A) Both Statements are false.
(B) Statement I is true but Statement II is false.
(C) Statement II is true but Statement I is false.
(D) Both Statements are true.
Answer:
(D) Both Statements are true.

Question 48.
Which of the following is not a recognized approach for determining the cost of equity?
(A) Dividend discount model approach
(B) Before-tax cost of preferred stock plus risk premium approach
(C) Capital-asset pricing model approach
(D) Before-tax cost of debt plus risk premium approach
Answer:
(B) Before-tax cost of preferred stock plus risk premium approach

Question 49.
While calculating WACC on market value basis which of the following is not considered –
(A) After tax cost of debt
(B) Reserve and surplus
(C) Weight of each fund in capital structure
(D) Cost of term loan
Answer:
(B) Reserve and surplus

Question 50.
CAPM describes the between risk and return for securities.
(A) Linear relationship
(B) Hypothetical relationship
(C) No relationship
(D) Diagonal relationship
Answer:
(A) Linear relationship

Question 51.
Janardan is attempting to determine his company’s weighted-average cost of capital. His first step was to determine the required rates of return for his company’s long-term debt, preferred stock, and common stock. He then adjusted these required rates of return by multiplying each return by one minus the company’s marginal tax rate. Janardan is planning on using these three adjusted required return figures as his component costs of capital. How is Janardan doing so far?
(A) All three of Janardan’s component cost figures are correct.
(B) All three component cost figures are wrong.
(C) Only the required return (yield) on preferred stock and debt should have been adjusted for taxes.
(D) Only the required return (yield) on debt should have been adjusted for taxes.
Answer:
(D) Only the required return (yield) on debt should have been adjusted for taxes.

Question 52.
Which of the following may be defined as the cost of raising an additional rupee of capital?
(A) Average cost of capital
(B) Cost of retained earnings
(C) Marginal cost of capital
(D) Marginal cost of reserve & surplus
Answer:
(C) Marginal cost of capital

Question 53.
The non-diversifiable risk is attributable to factors that affect –
(A) Particular business
(B) All businesses
(C) Particular project
(D) Not to all businesses
Answer:
(B) All businesses

Question 54.
How the economic value added (EVA) is calculated?
(A) It is the difference between the market value of the firm and the book value of equity.
(B) It is the firm’s net operating profit after tax (NOPAT) less cost of capital.
(C) It is the net income of the firm less cost that equals the weighted average cost of capital multiplied by the book value of liabilities and equities.
(D) None of the above is correct.
Answer:
(B) It is the firm’s net operating profit after tax (NOPAT) less cost of capital.

Question 55.
Assertion (A):
The marginal weights represent the proportion of funds the firm intends to employ.
Reason (R):
The problem of choosing between the book value weights and the market value weights does not arise in the case of marginal cost of capital computation.
Select the correct answer from the options given below:
(A) A is true but R is false
(B) A is false but R is true
(C) A and R both are true but R is not correct explanation of A
(D) A and R both are true and R is correct explanation of A
Answer:
(D) A and R both are true and R is correct explanation of A

Question 56.
Which of the following is example of non-diversifiable risk?
(W) Interest Rate Changes
(X) Inflation
(Y) Political Changes
Select the correct answer from the options given below:
(A) (W) & (Y)
(B) (W) & (X)
(C) (X) & (Y)
(D) All of the above
Answer:
(D) All of the above

Question 57.
The cost of equity capital is all of the following EXCEPT:
(A) the minimum rate that a firm should earn on the equity-financed part of an investment.
(B) a return on the equity-financed portion of an investment that, at worst, leaves the market price of the stock unchanged.
(C) by far the most difficult component cost to estimate.
(D) generally lower than the before-tax cost of debt.
Answer:
(D) generally lower than the before-tax cost of debt.

Question 58.
Which of the following risk can be eliminated by an investor?
(A) Diversifiable risk
(B) Non-diversifiable risk
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(A) Diversifiable risk

Question 59.
Required rate of return = ?
(A) Risk free rate + Risk premium
(B) Risk free rate – Risk premium
(C) Risk free rate + Risk premium (1 -1)
(D) Risk free rate – Risk premium (1 +1)
Answer:
(A) Risk free rate + Risk premium

Question 60.
In calculating the proportional amount of equity financing employed by a firm, we should use:
(A) The common stock equity account on the firm’s balance sheet.
(B) The sum of common stock and preferred stock on the balance sheet.
(C) The book value of the firm.
(D) The current market price per share of common stock times the number of shares outstanding.
Answer:
(D) The current market price per share of common stock times the number of shares outstanding.

Question 61.
The New York based financial advisory postulated a concept of economic value added.
(A) Shawn Stewart & Co.
(B) Stem Stewart & Co.
(C) Stem Shawn & Co.
(D) S.S.&Co.
Answer:
(B) Stem Stewart & Co.

Question 62.
In calculating the costs of the individual components of a firm’s financing, the corporate tax rate is important to which of the following component cost?
(A) Common stock
(B) Debt
(C) Preferred stock
(D) None of the above
Answer:
(B) Debt

Question 63.
The rate of return on its existing assets that a firm must earn to maintain the current value of the firm’s stock is called the:
(A) Return on equity
(B) Internal rate of return
(C) Weighted average cost of capital
(D) Current yield
Answer:
(C) Weighted average cost of capital

Question 64.
Economic value added measures –
(A) the excess earning over P/E ratio
(B) the excess returns over cost of capital.
(C) the excess returns over existing EPS
(D) the excess earning over ROE
Answer:
(B) the excess returns over cost of capital.

Question 65.
Which one of the following is a correct statement regarding a firm’s weighted average cost of capital (WACC)?
(A) The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.
(B) An increase in the market risk premium will tend to decrease a firm’s WACC.
(C) A reduction in the risk level of a firm will tend to increase the firm’s WACC.
(D) The WACC will decrease when the tax rate decreases for all firms that utilize debt financing.
Answer:
(A) The WACC can be used as the required return for all new projects with similar risk to that of the existing firm.

Question 66.
If a company’s EVA is negative –
(A) it is destroying shareholders wealth even though it may be reporting positive and growing EPS or return on capital employed
(B) it is destroying the overall cost of capital of the firm
(C) it is increasing the overall cost of capital of the firm causing low NPV
(D) it is increasing the overall cost of capital of the firm which can be adjusted by risk premium
Answer:
(A) it is destroying shareholders wealth even though it may be reporting positive and growing EPS or return on capital employed

Question 67.
The term ‘EVA’ is used for:
(A) Extra Value Analysis
(B) Economic Value Added
(C) Expected Value Analysis
(D) Engineering Value Analysis
Answer:
(B) Economic Value Added

Question 68.
Market values are often used in computing the weighted average cost of capital because –
(A) This is the simplest way to do the calculation.
(B) This is consistent with the goal of maximizing shareholder value.
(C) This is required by the Securities & Exchange Board of India.
(D) This is a very common mistake.
Answer:
(B) This is consistent with the goal of maximizing shareholder value.

Question 69.
…………. enhance the market value of shares and therefore equity capital is not free of cost.
(A) Face value
(B) Dividends
(C) Redemption value
(D) Book value
Answer:
(B) Dividends

Question 70.
Consider statements given below:
1. A debt-equity ratio of 2:1 indicates that for every 1 unit of equity, the company can raise 2 units of debt. The cost of floating a debt is greater than the cost of floating an equity issue.
State True or False:
(A) 1-True, 2-True
(B) 1-False, 2-True
(C) 1-False, 2-False
(D) 1-True, 2-False
Answer:
(D) 1-True, 2-False

Question 71.
Which one of the following represents ……….. the best estimate for a firm’s pre-tax cost of debt?
(A) twice the rate of return currently offered on risk-free securities
(B) the firm’s historical cost of capital
(C) the current yield-to-maturity on the firm’s existing debt
(D) the current coupon on the firm’s existing debt
Answer:
(C) the current yield-to-maturity on the firm’s existing debt

Question 72.
EVA = ?
(A) PAT – (Capital Employed × WACC)
(B) NOPAT -(Capital Employed × Ke)
(C) NOPAT-(Capital Employed × WACC)
(D) NOPAT – (Total Assets × Ke × Kd)
Answer:
(C) NOPAT-(Capital Employed × WACC)

Question 73.
An increase in market value of preferred stock will ………. the cost of preferred stock.
(A) increase
(B) not affect
(C) either increase or decrease
(D) decrease
Answer:
(D) decrease

Question 74.
Which of the following is advantage of EVA?
(A) The use of EVA is a substitute for detailed analysis of business drivers.
(B) EVA improves the overall cost of capital.
(C) In some cases, company pay bonuses to the employees on the basis of EVA generated. Thus, it promotes the employees for working hard for generating higher revenue.
(D) EVA improves the skill of financial analyst.
Answer:
(C) In some cases, company pay bonuses to the employees on the basis of EVA generated. Thus, it promotes the employees for working hard for generating higher revenue.

Question 75.
Capital structure weights are based on the:
(A) market value of a firm’s equity and the face value of its debt.
(B) initial issue values of a firm’s debt and equity.
(C) firm’s dividend and bond yields.
(D) market values of a firm’s debt and equity.
Answer:
(D) market values of a firm’s debt and equity.

Question 76.
The average of a firm’s cost of equity and after tax 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) Weighted average cost of capital
Answer:
(D) Weighted average cost of capital

Question 77.
Which of the following action can be taken to improve EVA?
(A) Improve Asset Turnover Ratios
(B) Change the capital structure by substituting lower cost debt for higher cost equity
(C) Both (A) and (B)
(D) Neither (A) nor (B)
Answer:
(C) Both (A) and (B)

Question 78.
Sam Toys is considering developing and distributing a new board game for children. The project is similar in risk to the firm’s current operations. The firm maintains a debt-equity ratio of 0.40 and retains all profits to fund the firm’s rapid growth. How should the firm determine its cost of equity?
(A) by adding the market risk premium to the after tax cost of debt
(B) by multiplying the market risk premium by (1 – 0.40)
(C) by using the dividend growth model
(D) by using the capital asset pricing model
Answer:
(D) by using the capital asset pricing model

Question 79.
Market value added is the difference between –
(A) EPS and Price Earning per share
(B) Cost of capital and economic value added
(C) The Company’s adjusted value for inflation and book value of various assets
(D) The Company’s market and book value of shares.
Answer:
(D) The Company’s market and book value of shares.

Question 80.
All else constant, which one of the following will increase a firm’s cost of equity if the firm computes that cost using the security market line approach? Assume the firm currently pays an annual dividend of ₹1 a share and has a beta of 1.2.
(A) a reduction in the dividend amount
(B) an increase in the dividend amount
(C) a reduction in the market rate of return
(D) a reduction in the risk-free rate
Answer:
(D) a reduction in the risk-free rate

Question 81.
………. represents the economic profits generated by a business above and beyond the minimum return required by all providers of capital.
(A) Shareholder Value Added (SVA)
(B) Economist Value Added (EVA)
(C) Market Makers Value Added (MM VA)
(D) Debt holders Value Added (DVA)
Answer:
(A) Shareholder Value Added (SVA)

Question 82.
A firm’s overall cost of equity is:
(A) is generally less that the firm’s WACC given a leveraged firm.
(B) unaffected by changes in the market risk premium.
(C) highly dependent upon the growth rate and risk level of the firm.
(D) generally less than the firm’s after tax cost of debt.
Answer:
(C) highly dependent upon the growth rate and risk level of the firm.

Question 83.
The common stock of a company must provide a higher expected return than the debt of the same company because –
(A) There is less demand for stock than for bonds.
(B) There is greater demand for stock than for bonds.
(C) There is more systematic risk involved for the common stock.
(D) There is a market premium required for bonds.
Answer:
(C) There is more systematic risk involved for the common stock.

Question 84.
The after tax cost of debt generally increases when:
I. A firm’s bond rating increases.
H. Market rate of interest increases.
III. Tax rates decrease.
IV. Bond prices rise.
Select correct answer from the options given below:
(A) I & III only
(B) II & III only
(C) I, II & III only
(D) II, III & IV only
Answer:
(B) II & II only

Question 85.
Rank in ascending order (ie. 1 = lowest, while 3 = highest) the likely after-tax component costs of a Company’s long-term financing.
(A) 1 = bonds; 2 = common stock; 3 = preferred stock.
(B) 1 = bonds; 2 = preferred stock; 3 = common stock.
(C) 1 = common stock; 2 = preferred stock; 3 = bonds.
(D) 1 = preferred stock; 2 = common stock; 3 = bonds.
Answer:
(B) 1 = bonds; 2 = preferred stock; 3 = common stock.

Question 86.
The cost of preferred stock is computed the same as the:
(A) Pre-tax cost of debt
(B) Return on an annuity
(C) After tax cost of debt
(D) Return on a perpetuity
Answer:
(D) Return on a perpetuity

Question 87.
The pre-tax cost of debt:
(A) is based on the current yield to maturity of the firm’s outstanding bonds.
(B) is equal to the coupon rate on the latest bonds issued by a firm.
(C) is equivalent to the average current yield on all of a firm’s outstanding bonds.
(D) is based on the original yield to maturity on the latest bonds issued by a firm.
Answer:
(A) is based on the current yield to maturity of the firm’s outstanding bonds.

Question 88.
The cost of preferred stock:
(A) is equal to the dividend yield.
(B) is equal to the yield to maturity.
(C) is highly dependent on the dividend growth rate.
(D) is independent of the stock’s price.
Answer:
(A) is equal to the dividend yield.

Question 89.
………. describes the relationship between non diversifiable and return for securities.
(A) Risk Reward Model
(B) CAPM Model
(C) MM Model
(D) Stewart Model
Answer:
(B) CAPM Model

Question 90.
The after tax cost of debt:
(A) varies inversely to changes in market interest rates.
(B) will generally exceed the cost of equity if the relevant tax rate is zero.
(C) is unaffected by changes in the market rate of interest.
(D) has a greater effect on a firm’s cost of capital when the debt-equity ratio increases.
Answer:
(D) has a greater effect on a firm’s cost of capital when the debt-equity ratio increases.

Question 91.
Match the following:
List I — List II
A. Expected dividend — 1. Flotation cost
B. Beta coefficient — 2. Retained earnings
C. Issue expenses — 3. CAPM
D. Personal tax rate — 4. Growth rate
Select the correct answer from the options given below:
Cost of Capital – Financial Management MCQ 4
Answer:
(C)

Question 92.
Weighted average cost of capital for a firm may be dependent upon the firm’s:
1. Rate of growth
2. Debt-equity ratio
3. Preferred dividend payment
4. Retention ratio
Select correct answer from the options given below:
(A) 1 & 3 only
(B) 2 & 4 only
(C) 1, 2 & 4 only
(D) 1,2,3 & 4
Answer:
(D) 1,2,3 & 4

Question 93.
By observing the financial market, we can observe that –
(A) Normally cost equity is more than cost of debt
(B) Normally cost of debt is more than cost of equity
(C) If beta factor is more than 1 then security is less risky than market
(D) None of the above
Answer:
(D) None of the above

Question 94.
Which one of the following statements is correct for a firm that uses debt in its capital structure?
(A) The WACC should decrease as the firm’s debt-equity ratio increases.
(B) When computing the WACC, the weight assigned to the preferred stock is based on the coupon rate multiplied by the par value of the preferred.
(C) The firm’s WACC will decrease as the corporate tax rate decreases.
(D) The weight of the common stock used in the computation of the WACC is based on the number of shares outstanding multiplied by the book value per share.
Answer:
(A) The WACC should decrease as the firm’s debt-equity ratio increases.

Question 95.
Match List-I with List-II:
Cost of Capital – Financial Management MCQ 5
Answer:
(A)

Question 96.
As per Net Income approach if capitalization rate increases, market value of firm –
(A) Decreases
(B) Increases
(C) Remains constant
(D) Without data it is not possible to tell what will happen
Answer:
(A) Decreases

Question 97.
Which of the following formula is correct to calculate the value of levered firm as per MM Model? .
(A) Value of unlevered firm – (Value of debt × Tax Rate)
(B) Value of unlevered firm × Value of debt × Tax Rate
(C) Value of unlevered firm + (Value of debt × Tax Rate)
(D) Value of unlevered firm ÷ (Value of debt ÷ Tax Rate)
Answer:
(C) Value of unlevered firm + (Value of debt × Tax Rate)

Question 98.
Match List-I with List-II:
Cost of Capital – Financial Management MCQ 6
Answer:
(B)

Question 99.
P/E Ratio is –
(A) Profitability ratio
(B) Turnover ratio
(C) Market test ratio
(D) Liquid ratio
Answer:
(C) Market test ratio

Question 100.
Market price = ?
(A) P/E Ratio × EPS
(B) EPS/Ke
(C) D1/Ke
(D) All of the above
Answer:
(D) All of the above

Question 101.
R Ltd. has disbursed a dividend of 75 on each equity share of 25. The market price of share is 200. Corporate tax rate is 40. Its cost of equity is –
(A) 30.0%
(B) 37.5%
(C) 35.7%
(D) 33.5%
Answer:
(B) 37.5%
75/200 = 0375 Le. 37.5%

Question 102.
F Ltd. issued 1,00,000 equity share of ₹ 100 each at a premium of ₹ 20 each. Company has incurred issue expenses of ₹ 50,000. Corporate tax rate is 40%. The equity shareholders expects the rate of dividend to 18% p.a. Cost of equity = ?
(A) 15.60%
(B) 15.65%
(C) 15.06%
(D) 16.50%
Answer:
(C) 15.06%
Issue expenses are 50,000.
Issue expenses per share = 0.5.
Net proceeds per share = 120 – 0.5 = 119.5
18/119.5 = 0.1506 i.e. 15.06%

Question 103.
The equity of JPG Ltd. is traded in the market at ₹ 225 each. It book value per share is ₹ 100. The dividend expected at the year end per share is ₹ 45. The subsequent growth in dividends is expected at the rate of 0.06. Calculate the cost of equity capital.
(A) 0.26
(B) 0.22
(C) 0.33
(D) 0.28
Answer:
(A) 0.26
Cost of Capital – Financial Management MCQ 28

Question 104.
Sara Ltd. has its shares having face value of ₹ 25 each quoted on the stock exchange, the current price per share is ₹ 60. The gross dividends per share over the last four years have been ₹ 3, ₹ 3.3, ₹ 3.63 & ₹ 4. Calculate cost of equity.
(A) 17.33%
(B) 13.17%
(C) 15.33%
(D) 0.01733
Answer:
(A) 17.33%
It can be observed from the data that dividends are growing by 10%.
Cost of Capital – Financial Management MCQ 29

Question 105.
Current market price of equity shares of Jack Ltd. is ₹ 120. The company has issued new equity shares of ₹ 30 each at ₹ 120 and the cost of its flotation is ₹ 1.50 per share. The gross dividends per share over the last six years have been ₹ 3.15, ₹ 3.3, ₹ 3.48, ₹ 3.63, ₹ 3.81 and ₹ 4.02. It is expected to maintain the fixed dividend payout ratio in the future. Applicable tax rate is 35%. Cost of equity of Jack Ltd. is –
(A) 0.856
(B) 0.0856
(C) 0.0865
(D) 0.0586
Answer:
(B) 0.0856
It can be observed from the data of dividend that it growing by 5%.
Cost of Capital – Financial Management MCQ 31
Ke = 0.0856 = 8.56%

Question 106.
Bharat Ltd. has its equity shares of ₹ 10 each quoted in a stock exchange with market price of ₹ 140. A constant expected annual growth rate of 6% and a dividend of ₹ 9 per share has been paid for the last year. Calculate the cost of capital.
(A) 12.28%
(B) 12.43%
(C) 66.82%
(D) 12.81%
Answer:
(D) 12.81%
Cost of Capital – Financial Management MCQ 32

Question 107.
F Ltd. has paid-up capital of ₹ 10,00,000. Equity share of ₹ 10 each and the current market price of its equity shares is ₹ 630. The dividend declared by the company during last 5 years is given below:
Year — DPS
2014 — 13.50
2015 — 15.75
2016 — 22.50
2017 — 27.00
2018 — 31.50
Risk free rate of interest on government securities is 9%. Ke = ?
(A) 45.3%
(B) 30.2%
(C) 28.9%
(D) 16.4%
Answer:
(B) 30.2%
It can be observed from the data that dividend is growing by average rate of 24% as shown below. Hence, growth rate can be taken as 24%.
Cost of Capital – Financial Management MCQ 33

Question 108.
P Ltd. has 1,50,000 equity shares of ₹ 25 each and its current market value is ₹ 150 each. The before tax profit of the company for the year just ended is ₹ 36,36,363. Tax rate is 34%. Cost of equity of P Ltd. –
(A) 10.76%
(B) 12.72%
(C) 10.67%
(D) 13.48%
Answer:
(C) 10.67%
Profit after tax 3636,363 – 12,36,363 = 24,00,000
EPS =24,00,000/1,50,000 = 16 pcr share
Price Earning Method.
Cost of Capital – Financial Management MCQ 34

Question 109.
NSZ Ltd. has equity of 15 Million and 10% debentures of 20 Million. Cost of equity is 18% and pre-tax cost of debt is 1096. Company estimates its EBI for 7 Million. Applicable tax rate is 30%. What is the Economic value added of NSZ Ltd.
(A) 0.088 Million
(B) 0.678 Million
(C) 0.798 Million
(D) 0.533 Million
Answer:
(C) 0.798 Million
Cost of Capital – Financial Management MCQ 35
Cost of Capital – Financial Management MCQ 36

Question 110.
Maya Ltd. share beta factor (P) is 1.1214. Dividend paid by the company last year was ₹ 3.60 per share on face value of ₹ 20. The risk free rate of interest on government bonds is 7.596. The expected rate of return on company equity shares is 13%. What is the cost of equity (Ke) of
@ Maya Ltd.?
(A) 12.89%
(B) 13.67%
(C) 14.52%
(D) 13.03%
Answer:
(B) 13.67%
Ke = Rf+β(Rm– Rf)
= 7.5+1.1214(13-7.5)
= 13.6796

Question 111.
H Ltd. p is 1.8025. Dividend paid by the company last year was ₹ 9 per share on face value of ₹ 30. The risk free rate is 0.61275. Risk premium is 0.0825. Calculate cost of equity capital.
(A) 21%
(B) 6.28%
(C) 14.77%
(D) 12%
Answer:
(A) 21%
Ke = Rf+ p (Rm— Rf)
Note: Risk Premium = (Rm — Rf)
= 6.1275 + 1.8025 (8.25)
= 2196

Question 112.
Rao Ltd. earns profit after tax ₹ 3,96,000. Corporate tax is 0.4. Its capital structure consist of equity shares ₹ 9,60,000; 15% Term loan ₹ 4,80,000. Cost of equity is 0.12. Its economic value added is –
(A) ₹ 2,66,400
(B) ₹ 2,80,800
(C) ₹ 2,08,800
(D) ₹ 2,80,008
Answer:
(B) ₹ 2,80,800
Cost of Capital – Financial Management MCQ 37

Question 113.
Lava Inc.’s ₹ 100 par value preferred stock just paid its ₹ 10 per share annual dividend. The preferred stock has a current market price of ₹ 96 a share. The firm’s marginal tax rate is 40 percent, and the firm plans to maintain its current capital structure relationship into the future. The component cost of preferred stock to Lava Inc. would be closest to –
(A) 6.52 percent
(B) 6.25 percent
(C) 10.24 percent
(D) 10.42 percent
Answer:
(D) 10.42 percent
10/96=0.1042 i.e 10.42%

Question 114.
A financial consultant has gathered following facts for HPLC Ltd. Systematic risk of the firm is 1.1425. 182 days treasury bill yield is 6%. Expected yield on market portfolio is 13%. GDP growth rate is 996. Sensex is 39,118. What is the cost of equity?
(A) 13.96%
(B) 14.00%
(C) 14.52%
(D) 18.91%
Answer:
(B) 14.00%
Ke=Rf+p(Rm-Rf)
= 6 + 1.1425 (13 – 6)
= 14%

Question 115.
Following details are submitted by Rajlakhami Ltd.
EBIT
Equity Capital Reserves & Surplus 10% Debentures Current Assets Cost of Equity Income Tax Rate Economic Value Added = ?
(A) ₹ 43.75 lakh
(B) ₹ 40.75 lakh
(C) ₹ 43.57 lakh
(D) ₹ 45.37 lakh
Answer:
(A) ₹ 43.75 lakh
Cost of Capital – Financial Management MCQ 38

Question 116.
An analyst has calculated economic value added of ₹ 43,750 for Z Ltd. WACC of the company is 11.5% and applicable tax rate is 30%. The company paid interest of ₹ 1,00,000 during the year. Total assets of the company are ₹ 17,50,000. What is profit after tax (PAT) of the company?
(A) ₹ 2,45,000
(B) ₹ 1,45,000
(C) ₹ 1,75,000
(D) ₹ 3,15,000
Answer:
(C) ₹ 1,75,000
Cost of Capital – Financial Management MCQ 39

Question 117.
The beta coefficient of Zebra Ltd. is 1.16. The company has been maintaining 2.5% rate of growth in dividends and earnings. The last dividend paid was ₹ 1.20 per share. Return on government securities is 5%. Return on market portfolio is 7%. The current market price of one share of Zebra Ltd. is ₹ 14. The earnings per share is ₹ 1.95. It was decided to take cost of equity, the average for four methods that are generally adopted to calculate the cost of equity in general. Average Ke = ?
(A) 10.33%
(B) 13.93%
(C) 11.29%
(D) 7.32%
Answer:
(A) 10.33%
Cost of Capital – Financial Management MCQ 40

Question 118.
A Company issues ₹ 50,00,000 12% Debentures of ₹ 100 each. Risk premium is 8%. Debentures are redeemable after the expiry of fixed period of 7 years. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at par.
(A) 0.78
(B) 7.8%
(C) 8.7%
(D) 0.87
Answer:
(B) 7.8%
Cost of Capital – Financial Management MCQ 41

Question 119.
Prsanna Ltd. issued 12% bonds of ₹ 100 each at par. Corporate tax rate is 34% including surcharge and education cess. Cost of Debt = ?
(A) 7.92%
(B) 8.42%
(C) 10%
(D) 12.48%
Answer:
(A) 7.92%
Cost of Capital – Financial Management MCQ 42

Question 120.
Parag Ltd. issued 14% bonds of ₹ 100 each at 98%. Corporate tax rate is 34%. Issue expense per bond was ₹ 1.5. Cost of Debt=?
(A) 9.24%
(B) 9.38%
(C) 9.58%
(D) 9.12%
Answer:
(C) 9.58%
Cost of Capital – Financial Management MCQ 43

Question 121.
A Company issues ₹ 75,00,000 12% Debentures of ₹ 100 each. Risk premium is 13.5%. Debentures are redeemable after the expiry of fixed period of 7 years at par. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at 10% discount.
(A) 9.72%
(B) 7.80%
(C) 9.27%
(D) 8.46%
Answer:
(A) 9.72%
Cost of Capital – Financial Management MCQ 44

Question 122.
A Company issues ₹ 48,50,000 12% Debentures of ₹ 100 each. Debentures are redeemable at par after the expiry of fixed period of 7 years. The Company is in 35% tax bracket. Calculate the cost of debt after tax, if debentures are issued at 10% premium. –
(A) 6.77%
(B) 6.07%
(C) 7.60%
(D) 6.88%
Answer:
(B) 6.07%
Cost of Capital – Financial Management MCQ 45

Question 123.
Following data is available for XYZ Ltd.:
No. of debentures = ₹ 5,00,000
Face value = ₹ 1,000
Coupon rate = 8%
Discount on issue = 1% of face value
Issue expenses = ₹ 6,25,000
Term =12 years
Corporate tax rate = 25%
These debentures are redeemable at premium of ₹ 14.
What is cost of debt (Kd)?
(A) 6.20%
(B) 5.87%
(C) 6.44%
(D) 8.32%
Answer:
(A) 6.20%
Cost of Capital – Financial Management MCQ 46

Question 124.
Y Ltd. issues preference shares of face value ₹ 500 each carrying 14% dividend and it realizes ₹ 480 per share. The shares are repayable after 12 years at 2% premium. Corporate tax rate is 25%. Issue expense per share was ₹ 2.5.
(A) 14.65%
(B) 15.82%
(C) 14.73%
(D) 14.92%
Answer:
(C) 14.73%
Cost of Capital – Financial Management MCQ 47

Question 125.
PAPA Ltd. retains ₹ 26,25,000 out of its current earnings. The expected rate of return to the shareholders, if they had invested the funds elsewhere is 15%. The brokerage is 2% and the shareholders come in 14% tax bracket. Calculate the cost of retained earnings.
(A) 12.64%
(B) 11.37%
(C) 14.80%
(D) 12.90%
Answer:
(A) 12.64%
Since, the expected rate of return to the shareholders, if they had invested the funds elsewhere is 15%. The brokerage is 2%. Net Ke = 15-0.3 = 14.7.
Cost of retained earnings:
K = Ke (1 – tp) tp = Personal tax rate applicable to shareholder.
= 14.7 (1 – 0.14)
= 12.64%

Question 126.
Chetna Fashions is expected to pay an annual dividend of ₹ 0.80 a share next year. The market price of the stock is ₹ 22.40 and the growth rate is 5%. What is the firm’s cost of equity?
(A) 7.58 percent
(B) 7.91 percent
(C) 8.24 percent
(D) 8.57 percent
Answer:
(D) 8.57 percent
Cost of Capital – Financial Management MCQ 48

Question 127.
Sweet Treats common stock is currently priced at ₹ 19.06 a share. The company just paid ₹ 1.15 per share as its annual dividend. The dividends have been increasing by 2.5% annually and are expected to continue doing the same. What is this firm’s cost of equity?
(A) 8.68%
(B) 8.86%
(C) 6.18%
(D) 6.03%
Answer:
(A) 8.68%
Cost of Capital – Financial Management MCQ 49

Question 128.
Narendra Ltd. is planning for issue of 15% Preference Shares of ₹ 100 each, redeemable at par after 8 years. They are expected to be sold at a premium of 596. Flotation cost is 9% of face value. Corporate tax is 35% and corporate dividend tax is 10%. The cost of preference shares on the basis of present value of future cash flow shall be –
Use following rates for your calculations:
Cost of Capital – Financial Management MCQ 50
(A) 17.49%
(B) 16.22%
(C) 18.34%
(D) 19.20%
Answer:
(A) 17.49%

Question 129.
Z Ltd. is planning for issue of 15% Debentures of ₹ 100 each, redeemable at par after 5 years. They are expected to be sold at par. Flotation cost is 10% of face value. Corporate tax is 35%. Cost of debentures on the basis on present value of future cash flow shall be –
Use following rates for your calculations:
Cost of Capital – Financial Management MCQ 27
(A) 11.37%
(B) 12.57%
(C) 14.87%
(D) 12.97%
Answer:
(B) 12.57%

Question 130.
Ramola Ltd. report its NOPAT ₹ 25,00,000. Its capital employed and economic value added is ₹ 60,00,000 & ₹ 19,00,000 respectively. What is overall cost of capital of Ramola Ltd.
(A) 10.9%
(B) 11%
(C) 10%
(D) 9.8%
Answer:
(C) 10%
EVA = NOPAT – (Capital Employed ×WACC)
19,00,000 = 25,00,000 – (60,00,000 × x)
– 6,00,000 = – 60,00,000x
x = 0.1 ie. 10%

Question 131.
Mr. Investor, purchases an equity share of growing company, ATT Ltd. for ₹ 210. He expects that the ATT Ltd. to pay dividend of ₹ 10.5, ₹ 11.025 & ₹ 11.575 in year 1, 2 & 3 respectively. He expects to sell shares at the end of year 3 at ₹ 243.10. Determine the growth rate in dividend.
(A) 4%
(B) 5%
(C) 6%
(D) 7%
Answer:
(B) 5%
Cost of Capital – Financial Management MCQ 51

Question 132.
Mr. Lucky, purchases an equity share of growing company, XYY Ltd. for ₹ 525. He expects that the XYY Ltd. to pay dividend of ₹ 26.25, ₹ 27.83 & ₹ 29.50 in year 1, 2 & 3 respectively. He expects to sell shares at the end of year 3 at ₹ 607.75. What is the required rate of return of Mr. Lucky on his equity investment?
(A) 11.50%
(B) 10.50%
(C) 10.05%
(D) 11.05%
Answer:
(D) 11.05%
Cost of Capital – Financial Management MCQ 52

Question 133.
Mumbai Ltd. expected to pay dividend at ₹ 2 for the next year. As the company is a market leader with good future, dividend is likely to grow by 5% every year. The equity shares are now treaded at ₹ 80 per share in the stock exchange. Tax rate applicable to the company is 50%. The capital structure of the company also contains debt on which interest is payable @ 14%. The. capital structure has ratio of Equity & Debt 80:20. WACC = ?
(A) 9.40%
(B) 7.40%
(C) 8.40%
(D) 7.98%
Answer:
(B) 7.40%
Cost of Capital – Financial Management MCQ 56

Question 134.
Beeta Ltd. has furnished the following information:
Earnings Per Share (EPS) — ₹ 14
Dividend Payout Ratio — 25%
Market Price Per Share — ₹ 140
Rate of Tax — 26%
Growth rate of dividend — 9%
The company wants to raise additional capital of ₹ 10 lakhs including debt of 14 lakhs. Cost of debt (before tax) is 12% up to ₹ 2 lakhs and 1496 beyond that. Compute the marginal weighted average cost of additional capital.
(A) 11.75%
(B) 10.75%
(C) 11.57%
(D) 12.57%
Answer:
(B) 10.75%
Cost of Capital – Financial Management MCQ 54

Question 135.
National Ltd. has 12,000 equity shares of ₹ 100 each. Sale price is equity share ₹ 115 per share; flotation cost ₹ 5 per share. Expected dividend growth rate is 5% and expected dividend at the end of the financial year is ₹ 11 per share. What is the cost of equity shares of National Ltd.?
(A) 0.1133
(B) 0.1278
(C) 0.1475
(D) 0.15
Answer:
(D) 0.15
Cost of Capital – Financial Management MCQ 55

Question 136.
Raman Ltd. has 1096 Preference Share Capital of ₹ 4,50,000. Face value is ₹ 10. Issue price of preference share is ₹ 100 per share; flotation cost ₹ 2 per share. What is the cost of preference shares to Raman Ltd.?
(A) 10.20%
(B) 9.10%
(C) 12.50%
(D) 11.22%
Answer:
(A) 10.20%
Cost of Capital – Financial Management MCQ 66

Question 137.
Raja Ltd. has 8% Debentures (Face value ₹ 2,500) of ₹ 9,00,000 which are redeemable at 5% premium, sold at 98%, 3% flotation costs with maturity of 20 years. Corporate tax rate is 35%. The company paid debenture interest of 60,000 out of total interest payable of 72,000. After tax cost of debt is -…………
(A) 8.7%
(B) 7.7%
(C) 5.7%
(D) 6.7%
Answer:
(C) 5.7%
Cost of Capital – Financial Management MCQ 67

Question 138.
Equity shares of Anuradha Ltd. are quoted in stock exchange at ₹ 325 per share. New issue priced at ₹ 312.5 and flotation cost will be ₹ 12.5 per share. During 5 years dividend on equity shares have steadily grown from ₹ 26.5 to ₹ 35.48. Dividend at the end of current year is expected at ₹ 37.5 per share. It has retained earning of ₹ 30,00,000. Corporate tax is 35% and shareholders are in tax slab of 20%. Ignore dividend tax. Calculate cost of equity and cost of retained earnings?
(A) Ke= 18.50%; Kr = 14.80%
(B) Ke = 18.00%; Kr = 14.40%
(C) Ke = 17.54%; Kr = 14.03%
(D) Ke = 18.94%; Kr = 15.15%
Answer:
(A) Ke= 18.50%; Kr = 14.80%
During 5 years dividend on equity shares have steadily grown from 26.5 to 35.48. Hence, growth rate = g = 6%.
Cost of Capital – Financial Management MCQ 68

Question 139.
Compute the EVA with the help of following information:
Equity — 10,00,000
Debt (10%) — 5,00,000
Profit after tax — 2,00,000
Risk-free rate of return is — 7%.
Beta (β) = 0.9
Market rate of return = 15%.
Applicable tax rate is 40%.
(A) ₹ 57,950
(B) ₹ 57,590
(C) ₹ 57,905
(D) ₹ 59,750
Answer:
(A) ₹ 57,950
Cost of Capital – Financial Management MCQ 86
Cost of Capital – Financial Management MCQ 70

Question 140.
The company proposes to issue 11 year 15% debentures of ₹ 500. Yield on debentures of similar maturity and risk class is 16%; flotation cost 3% of face value. Corporate tax is 35%. Issue price and after tax cost of debt would be –
(A) Issue price = 486.75; Kd = 12.10%
(B) Issue price = 468.75; Kd = 11.10%
(C) Issue price = 475.68; Kd = 10.10%
(D) Issue price = 457.86; Kd = 12.12%
Answer:
(B) Issue price = 468.75; Kd = 11.10%
Market price of debenturesCost of Capital – Financial Management MCQ 71
Since, the yield on debentures of similar maturity and risk class is 16%, the company would be required to offer debenture at discount.
Cost of Capital – Financial Management MCQ 72

Question 141.
From the following details calculate the WACC:
Cost of Capital – Financial Management MCQ 9
(A) 17.28%
(B) 16.52%
(C) 16.34%
(D) 17.93%
Answer:
(A) 17.28%
Cost of Capital – Financial Management MCQ 73

Question 142.
A Company has ₹ 180 Million of 10% Debentures having face value of ₹ 100. The debentures are redeemable after 3 years and interest is paid annually. The current ex-interest debenture market value is ₹ 103. Pre-tax cost of debentures on the basis of present value of future cash flow shall be –
Use following rates for your calculations:
Cost of Capital – Financial Management MCQ 10
(A) 9.32%
(B) 7.91%
(C) 8.02%
(D) 8.82%
Answer:
(D) 8.82%

Question 143.
The following is the capital structure of a company:
Cost of Capital – Financial Management MCQ 11
Current market price of equity share is ₹ 200. For the last year the company had paid equity dividend at 25% and its dividend is likely to grow 5% every year. Corporate tax rate is 30% and shareholders personal income tax rate is 20%. Compute WACC on the basis of book value.
(A) 13.36%
(B) 14.50%
(C) 13.96%
(D) 12.32%
Answer:
(A) 13.36%

Question 144.
The following is the capital structure of a company:
Cost of Capital – Financial Management MCQ 12
Current market price of equity share is ₹ 200. For the last year the company had paid equity dividend at 25% and its dividend is likely to grow 5% every year. Corporate tax rate is 30%. Compute WACC on the basis of market value.
(A) 14.5 percent
(B) 13.5 percent
(C) 12.9 percent
(D) 14.1 percent
Answer:
(A) 14.5 percent

Question 145.
Debt as percentage of total capital of the Kinara Ltd. is 20%. Its cost of equity is 16% and pre-tax cost of debt is 12%. Tax rate is 50%. What is overall cost of capital
(A) 16%
(B) 14%
(C) 15%
(D) 16.6%
Answer:
(B) 14%
Cost of Capital – Financial Management MCQ 74

Question 146.
Debt as percentage of total capital of the Tiger Ltd. is 60%. Its cost of equity is 24% and pre-tax cost of debt is 20%. Tax rate is 50%. What is overall cost of capital of Tiger Ltd.?
(A) 14.6%
(B) 13.6%
(C) 17.6%
(D) 15.6%
Answer:
(D) 15.6%
Cost of Capital – Financial Management MCQ 75

Question 147.
Compute the EVA with the help of following information:
Equity — 15,00.000
Debt (10%) — 7,00,000
Profit after tax — 4,00,000
Risk-free rate of return is 7%. Beta (β) 0.9, Market rate of return 15%. Applicable tax rate is 40%.
(A) 1,87,020
(B) 1,78,020
(C) 1,87,200
(D) 1,85,200
Answer:
(A) 1,87,020
Cost of Capital – Financial Management MCQ 76

Question 148.
AB Ltd. estimates the cost of equity and debt components of its capital for different levels of debt; equity mix as follows:
Debt as % of total capital Cost of equity Cost of debt (pre-tax)
Cost of Capital – Financial Management MCQ 13
Tax Rate is 50%
Select the best capital mix for the company so that its overall cost of capital is minimum.
(A) I
(B) II
(C) III
(D) IV
Answer:
(B) II

Question 149.
The preferred stock of ISO Ltd. pays an annual dividend of ₹ 6.50 a share and sells for ₹ 48 a share. What is ISO’s cost of preferred stock?
(A) 9.19%
(B) 7.38%
(C) 13.54%
(D) 9.46%
Answer:
(C) 13.54%
6.5/48 = 0.1354 i.e. 13.54%

Question 150.
Calculate the weighted marginal cost of capital for the company, if it raises ₹ 10 Crores next year, given the following information:
(i) Next expected dividend is ₹ 3.60 and expected to grow at the rate of 7%.
(ii) Income-tax rate is 40%.
(iii) Amount will be raised by equity and debt in equal proportions.
(iv) Additional issue of equity shares will result in the next price per share being fixed at ₹ 32.
(v) Debt capital raised by way of term loans will cost 15%. for the first ₹ 2.5 Crores and 16%. for the balance.
Select the correct answer from the options given below:
(A) 12.775%.
(B) 15.625%.
(C) 13.775%.
(D) 15.475%.
Answer:
(B) 15.625%.
Cost of Capital – Financial Management MCQ 77

Question 151.
Nikon Enterprises just paid an annual dividend of ₹ 1.56 per share. This dividend is expected to increase by 3 percent annually. Currently, the firm has a beta of 1.13 and a stock price of ₹ 28 a share. The risk-free rate is 3 percent and the market rate of return is 10.5 percent. What is your best estimate of Nikon’s cost of equity?
(A) 8.74 percent
(B) 11.48 percent
(C) 9.72 percent
(D) 10.11 percent
Answer:
(D) 10.11 percent
Cost of Capital – Financial Management MCQ 78

Question 152.
Jakson Ltd. has 12,000 bonds outstanding at a quoted price of 98 percent of face value. The bonds mature in eleven years and carry a 9 percent annual coupon. What is your best estimate of Jackson’s after-tax cost of debt if the applicable tax rate is 35 percent?
(A) 6.03%
(B) 5.77%
(C) 8.33%
(D) 7.04%
Answer:
(A) 6.03%
Cost of Capital – Financial Management MCQ 79

Question 153.
Mona Industries has a capital structure of 55% common stock, 10% preferred stock, and 45% debt. The firm has a 60% dividend payout ratio, a beta of 0.89, and a tax rate of 38%. Given this, which one of the following statements is correct?
(A) The after-tax cost of debt will be greater than the current yield-to-maturity on the firm’s bonds.
(B) The firm’s cost of preferred is most likely less than the firm’s actual cost of debt.
(C) The firm’s cost of equity is unaffected by a change in the firm’s tax rate.
(D) The cost of equity can only be estimated using the SML approach.
Answer:
(C) The firm’s cost of equity is unaffected by a change in the firm’s tax rate.

Question 154.
Baba Ltd. has a cost of equity of 12%, a pre-tax cost of debt of 7%, and a tax rate of 35%. What is the firm’s weighted average cost of capital if the debt-equity ratio is 0.60?
(A) 9.21%
(B) 10.01%
(C) 10.13%
(D) 11.11%
Answer:
(A) 9.21%
Cost of Capital – Financial Management MCQ 80

Question 155.
JKL Ltd. has ₹ 10 equity shares amounting to ₹ 15 Crore. The current market price per equity share is ₹ 60. The prevailing default risk free interest rate on 10 year GOI treasury bonds is 5.5%. The average market risk premium is 8%. The beta of the company is 1.1875. K, = ?
(A) 15%
(B) 11%
(C) 12%
(D) 13%
Answer:
(A) 15%
K=Rf + β(Rm– Rf)
= 5.5 + 1.1875 × 8 = 15%

Question 156.
ABC Ltd. has three divisions: A, B & C. Division A has the least risk and Division C has the most risk. ABC Ltd. has an after tax cost of debt of 4.6% and a cost of equity of 9.5%. Company is financed with 50% debt & 50% equity. Management has told the divisional manager of Division A that projects in that division are assigned a discount rate that is 1% less than the firm’s weighted average cost of capital. What is the discount rate applicable to Division A?
(A) 6.65%
(B) 6.31%
(C) 7.18%
(D) 6.05%
Answer:
(D) 6.05%
Cost of Capital – Financial Management MCQ 81

Question 157.
PWA Ltd. has ₹ 1,000,9.5% debentures amounting to ₹ 1,500 Million. The debentures of PWA Ltd. are redeemable after 3 years and are quoting at ₹ 981.05 per debenture. The beta of the company is 1.1785. The applicable income tax rate for the company is 35%. Kd = ?
(A) 1.59%
(B) 6.87%
(C) 7.86%
(D) 8.67%
Answer:
(B) 6.87%
Cost of Capital – Financial Management MCQ 82

Question 158.
PWA Ltd. has ₹ 100,10.5% preference shares amounting to ₹ 100 Million. The preferred stock of the company is redeemable after 5 years is currently selling at ₹ 98.15 per preference share. The beta of the company is 1.7158. The applicable income tax rate for the company is 35%. KP =?
(A) 10%
(B) 11%
(C) 12%
(D) 13%
Answer:
(B) 11%
Cost of Capital – Financial Management MCQ 83

Question 159.
G Ltd. has 10,000 shares of common stock outstanding at a price per share of ₹ 46 and a rate of return of 14%. The Company has 5,000 shares of 7% preferred stock outstanding at a price of ₹ 58 a share. The outstanding debt has a total face value of ₹ 2,00,000 and a market price equal to 98% of face value. Yield-to-maturity (YTM) on the debt is 8.03%. What is the firm’s weighted average cost of capital?
(A) 10.62%
(B) 12.65%
(C) 8.62%
(D) 9.99%
Answer:
(A) 10.62%
Cost of Capital – Financial Management MCQ 84

Question 160.
Calculate the marginal cost of capital (MCC) for the firm if it raises ₹ 750 million for a new project. The firm plans to have a target debt to value ratio of 20%. The beta of new project is 1.4375. The debt capital will be raised through term loans. It will carry interest rate of 9.5% for the first ₹ 100 million and 10% for the next ₹ 50 million. The current market price per equity share is ₹ 60. The prevailing default risk free interest rate on 10-year GOI treasury bonds is 5.5%. The average market risk premium is 8%.
(A) 14.86%
(B) 12.22%
(C) 13.04%
(D) 15.95%
Answer:
(A) 14.86%
Cost of Capital – Financial Management MCQ 85
ABC Ltd. needs additional finance of 750 million with debt to value ratio of 80%.
This finance will be raised as follows:
Cost of Capital – Financial Management MCQ 87

Question 161.
Black & White Ltd. has a cost of equity of 11% and a pre-tax cost of debt of 8.5%. The firm’s target weighted average cost of capital is 9% and its tax rate is 35%. What is the firm’s target debt-equity ratio?
(A) 0.6203
(B) 0.5756
(C) 0.5572
(D) 0.5113
Answer:
(B) 0.5756
Kd = 8.5 (1 – 0.35) = 5.525%.
WACC is 9 thus total of product must be 900 (9 × 100).
Let the % of debt in total capital be ‘x’
Thus, % of equity must be 100 – x
Cost of Capital – Financial Management MCQ 88

Question 162.
You are analyzing the beta for A Ltd. and have divided the Company into four broad business groups, with market values and betas for each group.
Cost of Capital – Financial Management MCQ 14
Cost of Capital – Financial Management MCQ 15
A Ltd. had ₹ 50 billion in debt outstanding. Market risk premium is 8.5. Treasury bond rate is 7.5%. Estimate cost of equity for A Ltd.
(A) 16.85%
(B) 20.25%
(C) 18.34%
(D) 24.50%
Answer:
(C) 18.34%

Question 163.
R&G Company has equity share capital (2,00,000 shares) ₹ 20,00,000. The company’s share has current market price of ₹ 27.75 per share. The expected dividend per share in next year is 50% of the 2019 EPS. The EPS of the last 4 years is as follows. The past trends are expected to continue.
Cost of Capital – Financial Management MCQ 16
Calculate the cost of ordinary equity.
(A) 17%
(B) 24%
(C) 16%
(D) 21%
Answer:
(A) 17%
It can be observed from the data of EPS that it is growing by 12% per annum. Hence, growth rate can be taken 12%.
Cost of Capital – Financial Management MCQ 89
D1 = 2.773 × 50%
= 1.3865
It is given in problem that the expected divided per share in next year is 50% of the 2019 EPS.

Question 164.
The Company can issue 14% new debenture. The company’s debenture is currently selling at ₹ 98. Face value of debenture is ₹ 100. The company’s marginal tax rate is 50%. What is cost of debenture (i) based on book value; (ii) based on market value?
(A) 14% & 14.28%
(B) 6% & 6.12%
(C) 7% & 7.14%
(D) 8% & 8.16%
Answer:
(C) 7% & 7.14%
Cost of debt based on book value  Cost of debt based on marker value:
Cost of Capital – Financial Management MCQ 90

Question 165.
Ganesh Ltd. requires amount of ₹ 5,00,000 to finance a project. It was decided to raise such finance by issue of debentures. Cost of debt is 10% (before tax) up to ₹ 2,00,000 and 13% (before tax) beyond that. Tax rate is 30%. What is the average marginal cost of capital of new finance of ₹ 5,00,000?
(A) 7.37%
(B) 11.5%
(C) 8.26%
(D) 9.12%
Answer:
(C) 8.26%
Cost of Capital – Financial Management MCQ 91

Question 166.
C Ltd. wishes to raise additional finance of ₹ 20 lakhs for meeting its investment plans. C Ltd. has ? 4,00,000 in the form of retained earnings available for investment purposes. Further details are:
Debt equity ratio 25:75. Earnings per share, ₹ 12. Dividend payout 50% of earnings. Expected growth rate = 10%. Market price per share = ₹ 60. Tax rate = 30%. Shareholder’s personal tax rate=20%. Cost of debt at the rate of 10% (before tax) up to ₹ 2,00,000 and 13% (before tax) beyond that.
WACC = ?
(A) 16.27%
(B) 17.52%
(C) 15.89%
(D) 14.42%
Answr:
(A) 16.27%
Determination of Pattern for raising the additional finance:
Equity = 20,00,000 × 75% = 15,00,000
Debt = 20,00,000 × 25% = 5,00,000
Cost of equity – Dividend Growth Method:
Cost of Capital – Financial Management MCQ 92
Calculate cost of debt as per hint of previous question and then calculate WACC as shown below.
Cost of Capital – Financial Management MCQ 93
WACC = 1626.50 = 16.27%

Question 167.
Gentry Motor, Inc. a producer of turbine generator, is in this situation:
EBIT = ₹ 40 lakhs
Tax rate = 35%
Debt outstanding = ₹ 20 lakhs
Kd = 10%
Ke = 15%
Shares outstanding = 6,00,000 shares
What is the Gentry’s earning per share (EPS) and market price per share (Po)?
(A) EPS = 3.98; Market Price = ₹ 27.76
(B) EPS = 4; Market Price = ₹ 26.67
(C) EPS = 4.72; Market Price = ₹ 30.44
(D) EPS = 3; Market Price = ₹ 25
Answer:
(B) EPS = 4; Market Price = ₹ 26.67
Cost of Capital – Financial Management MCQ 94
Cost of Capital – Financial Management MCQ 95

Question 168.
Following are the extracts from financial statements of Zipway Ltd.:
Cost of Capital – Financial Management MCQ 17
Market price per equity share is 15 and per debenture is 95. Calculate WACC on market value basis.
(A) 12.25%
(B) 10.88%
(C) 14.56%
(D) 13.74%
Answer:
(B) 10.88%
Cost of Capital – Financial Management MCQ 96

Question 169.
Following data is available for H Ltd.:
Cost of Capital – Financial Management MCQ 18
All the earnings are distributed after payment of all taxes. Assume that the income-tax rate on the company is 35% and the additional tax on the amount
of dividend distributed is 20%. Calculate
WACC.
(A) 6.524%
(B) 8.125%
(C) 10,897%
(D) 12.346%
Answer:
(A) 6.524%
Cost of Capital – Financial Management MCQ 97

Question 170.
Following data is available for Z Ltd.:
Cost of Capital – Financial Management MCQ 19
All the earnings are distributed after payment of all taxes. Assume that the income-tax rate on the company is 35% and the additional tax on the amount of dividend distributed is 20%. Calculate WACC.
(A) 8.214%
(B) 10.582%
(C) 9.299%
(D) 12.324%
Answer:
(C) 9.299%
Cost of Capital – Financial Management MCQ 97

Question 171.
A company is planning to raise ₹ 20,00,000 additional long-term funds to finance its additional capital budget of the current year. The debentures of the company to be sold on a 14% net yield basis to the company, and equity shares to be sold at ₹ 50 per share net to the company, are the alternatives being considered. The company expects to pay dividend of ₹ 5 per share at the end of coming year. The required rate of return is 16%. Determine the growth rate of the company which market is anticipating.
(A) 3%
(B) 4%
(C) 5%
(D) 6%
Answer:
(D) 6%

Question 172.
The required rate of return is 16%. Management is anticipating 8% growth rate. The company expects to pay dividend of ₹ 5 per share at the end of coming year. On this basis, at what price should the equity share be sold by the company?
(A) 60.2
(B) 62.5
(C) 64.3
(D) 61.7
Answer:
(B) 62.5

Question 173.
Following information has been extracted from the books of Unique Fashioners Ltd.:
Cost of Capital – Financial Management MCQ 20

Applicable tax rate is 40%. Company has been paying 20% dividend per annum constantly. Compute average cost of capital on book value weights if the current market price of a share of ₹ 100 is ₹ 160.
(A) 14.87%
(B) 12.73%
(C) 9.24%
(D) 10.42%
Answer:
(D) 10.42%
Cost of Capital – Financial Management MCQ 98

Question 174.
Workout the marginal cost of capital from the following data:
Cost of Capital – Financial Management MCQ 21
(A) 13.83%
(B) 12.83%
(C) 14.83%
(D) 15.83%
Answer:
(A) 13.83%

Question 175.
Workout the marginal cost of capital from the following data:
Cost of Capital – Financial Management MCQ 22
(A) 15.20%
(B) 14.20%
(C) 16.20%
(D) 18.20%
Answer:
(C) 16.20%

Question 176.
Workout overall cost of capital after raising of additional finance from the following data:
Cost of Capital – Financial Management MCQ 23
(A) 12.91%
(B) 15.91%
(C) 17.91%
(D) 14.91%
Answer:
(D) 14.91%
Cost of Capital – Financial Management MCQ 99

Question 177.
The prevailing risk-free rate of interest in 10-Year GOl Treasury Bonds is 5.5%. The average risk premium is 8%. The beta of the company is 1.1875. The beta of project is 1.4375. The debt can be raised at an interest rate of 9.5% up to first 10 Crore and @ 10% for the rest of the amount. Tax rate is 35%. You are required to calculate cost of equity and debt.
Cost of Capital – Financial Management MCQ 24
Cost of Capital – Financial Management MCQ 25
Answer:
(A)
Cost of equity – CAPM Method:
K=Rf+P(Rm-Rf)
= 5.5 + 1.4375 × 8 = 17%Cost of Capital – Financial Management MCQ 100
The company now wants to take up a project requiring an investment of 75 Crore with a debt-equity ratio of 2096. Hence, debt portion will be 15 Crore and equity portion will be 60 Crore.
Cost of Capital – Financial Management MCQ 101

Question 178.
The prevailing risk-free rate of interest in 10-Year GOI Treasury Bonds is 5.5%. The average risk premium is 8%. The beta of the company is 1.1875. The company now wants to take up a project requiring an investment of ₹ 75 Crore with a debt- equity ratio of 20%. The beta of this project is 1.4375. The debt can be raised at an interest rate of 9.5% up to first ₹ 10 Crore and @10% for the rest of the amount. Find out the marginal cost of capital, if the tax rate is 35%.
(A) 13.38 percent
(B) 14.86 percent
(C) 15.34 percent
(D) 12.12 percent
Answer:
(B) 14.86 percent
Cost of equity – CAPM Method:
K=Rf+P(Rm-Rf)
= 5.5 + 1.4375 × 8 = 17%Cost of Capital – Financial Management MCQ 100
The company now wants to take up a project requiring an investment of 75 Crore with a debt-equity ratio of 2096. Hence, debt portion will be 15 Crore and equity portion will be 60 Crore.
Cost of Capital – Financial Management MCQ 101

Question 179.
Cost of equity and preference capital of Priyanka Ltd. are 17.43% & 10%. Before tax cost of debentures and term loan are 12% & 15%. Applicable tax rate is 30%. Ratio of weight in capital structure is 5:2:3:5 of Equity, Preference, Debt & Term Loan respectively. Priyanka Ltd. has following investment opportunities that are typical average risk projects for the company:
Projects — Rate of Return
A — 17.4%
B — 16.0%
C — 14.2%
D — 13.7%
E — 10.7%
Which projects should Priyanka Ltd. accept?
(A) A, B, C but not E & D
(B) A, B, D but not C & E
(C) A, B, C & D but not E
(D) B, C, D & E but not A
Answer:
(C) A, B, C & D but not E
Overall cost of capital of Priyanka Ltd. is 12.32% so it can accept the project that yield above it. Thus, it accept Project A, B, C & D but not E.

Question 180.
Sushant Ltd. gives following details:
₹ in lakhs
Equity shares — 50
10% Preference shares — 10
14% Debentures — 20
Equity shares are sold at ₹ 25 per share. Company will pay next year a dividend of ₹ 4 per share which will grow at 8% forever.
Company raises an additional ₹ 20 lakhs by issuing 15% debentures. This would increase the expected dividend to ₹ 5 per share with no change in growth rate, but the price will fall to ₹ 20 per share. What is the impact of raising additional finance?
(A) WACC fall from 17.8% to 15.2%
(B) WACC increases from 17.8% to 20.65%
(C) WACC fall from 21.65% to 18.7%
(D) WACC increases from 18.7% to 21.56%
Answer:
(D) WACC increases from 18.7% to 21.56%
Cost of Capital – Financial Management MCQ 102
Cost of Capital – Financial Management MCQ 103

Question 181.
Capital structure of S Ltd. is as under:
6% Debentures (₹ 100 each) — 2,00,000
7% Debentures (₹ 100 each) — 1,00,000
8% Pref. shares (₹ 100 each) — 2,00,000
Equity shares (₹ 100 each) — 4,00,000
Retained earnings — 1,00,000
EPS of the company in the past many years has been ₹ 15. Equity shares are sold at ₹ 125. Tax rate is 30% and shareholders’ personal tax liability is 10%. Find out WACC of the company on book value basis.
(A) 8.81 percent
(B) 10.92 percent
(C) 4.79 percent
(D) 15.33 percent
Answer:
(A) 8.81 percent
Cost of Capital – Financial Management MCQ 104
Cost of Capital – Financial Management MCQ 105

Question 182.
Shares of Alfa Ltd. are currently being quoted at a price earnings ratio of 7.5 times. Retained earnings of the company being 37.5% is ₹ 6 per share. Compute company’s cost of equity if investors’ expected annual growth rate is 8%.
(A) 15%
(B) 16%
(C) 17%
(D) 20%
Answer:
(C) 17%
Cost of Capital – Financial Management MCQ 106

Question 183.
If expected rate of return on equity shares is 1596, dividend just paid is ₹ 10 per share and expected annual growth rate is 10% then at what price share will trade in market at the end of year one?
(A) ₹ 222 per share
(B) ₹ 44.4 per share
(C) ₹ 111 per share
(D) ₹ 200 per share
Answer:
(A) ₹ 222 per share
Cost of Capital – Financial Management MCQ 107
Cost of Capital – Financial Management MCQ 108

Question 184.
A Ltd. gives following details:
Equity Capital [ 10 each] — ₹ 2,50,000
Market value per share — ₹ 20
Dividend per share — ₹  4
Debentures [ 100] — ₹ 1,00,000
Market value per debenture — 125
Interest rate — 10%
Tax rate — 50%
WACC based on market value = ?
(A) 12.20%
(B) 16.80%
(C) 18.40%
(D) 13.60%
Answer:
(B) 16.80%
Cost of Capital – Financial Management MCQ 109

Question 185.
B Ltd. gives following details:
Equity Capital [₹ 10 each] — ₹ 5,00,000
Market value per share — ₹ 12
Dividend per share — ₹ 2.88
Debentures [₹ 100] — ₹ 2,50,000
Market value per debenture 80
Interest rate — 8%
Tax rate — 50%
WACC based on market value = ?
(A) 19.25%
(B) 22.65%
(C) 16.45%
(D) 18.75%
Answer:
(A) 19.25%

Question 186.
P Ltd. is considering various proposals costing less than 30 lakhs. Company does not want to disturb its present capital structure of 30% debt and 70% of equity.
Other details:
Cost of Capital – Financial Management MCQ 26
Assuming the tax rate is 50%, compute the cost of capital of two projects ABC and XYZ whose fund requirements are 8 lakhs and 21 lakhs respectively
(A) ABC = 13.10%; XYZ = 11.12%
(B) ABC = 11.30%; XYZ = 12.15%
(C) ABC = 12.03%; XYZ = 15.12%
(D) ABC = 10.30%; XYZ = 13.15%
Answer:
(B) ABC = 11.30%; XYZ = 12.15%
Cost of Capital – Financial Management MCQ 110

Question 187.
Krishna Ltd. is currently financed with 10,00,000, 7% bonds and 20,00,000 of common stock. The stock has a beta of 1.5, risk-free rate of return 4% and market risk premium 3.5%. The marginal tax rate for a company of this size is 35%. Compute the WACC of Krishna Ltd. on book value basis?
(A) 6.87%
(B) 8.76%
(C) 9.34%
(D) 7.68%
Answer:
(D) 7.68%
Cost of Capital – Financial Management MCQ 111

Question 188.
Apoorva Ltd. has assets of ₹ 32,00,000 that have been financed as follows:
Equity shares (100 each) — 18,00,000
General reserve — 3,60,000
Debt — 10,40,000
For the year ended the company’s total profits before interest and taxes were 6,23,000. Company pays 8% interest on borrowed capital and the tax bracket is 40%. The market value of the equity is 150 per share. From the above, determine the weighted average cost of capital using market values as weights.
(A) 9.01%
(B) 10%
(C) 12%
(D) 11.23%
Answer:
(B) 10%
Cost of Capital – Financial Management MCQ 112

Question 189.
ABC Ltd. has 10,000 shares 7 each, 10,000,12% debentures and 20,000 as short term loan @ 10%. Tax rate for the company is 30%. Assume the cost of equity capital as 20%. Calculate WACC at book value.
(A) 16.24%
(B) 17.48%
(C) 14.26%
(D) 13.27%
Answer:
(A) 16.24%
Cost of Capital – Financial Management MCQ 113

Question 190.
Mohan Ltd. has paid increasing dividends of ₹ 0.54, ₹ 0.58, ₹ 0.62, ₹ 0.67 and ₹ 0.72 a share over the past 4 years, respectively. Firm estimates that future increases in their dividends will be comparable to the arithmetic average growth rate over these past 4 years. The stock is currently selling for? 38.60 a share. The risk-free rate is 4% and the market risk premium is 8%. What is your best estimate of cost of equity if their beta is 1.22?
(A) 14.06%
(B) 9.46%
(C) 12.97%
(D) 11.61%
Answer:
(D) 11.61%
(0.58 – 0.54)/0.54 × 100 = 7.41%
(0.62 – 0.58)/0.58 × 100 = 6.90%
(0.67 – 0.62)/0.62 × 100 = 8.07%
(0.72 – 0.67)/0.67 × 100 = 7.46%
Average rate of growth = 7.46%
Ke as per dividend growth model = (0.77/38.60) + 0.0746 = 0.0945 ie. 9.45%
Ke as per CAPM Model = 4 + (1.22 × 8)= 13.76%
Best estimate of cost of equity = (9.45 + 13.76)/2 = 11.61%

Question 191.
What is the overall (weighted average) cost of capital in the following situation?
The firm has 12 million in long-term debt, 2 million in preferred stock, and 8 million in common equity- all at market values. The before-tax cost for debt, preferred stock, and common equity forms of capital are 8%, 9%, and 15%, respectively. Assume 40% tax rate.
(A) 6.40%
(B) 6.54%
(C) 8.89%
(D) 10.90%
Answer:
(C) 8.89%
Cost of Capital – Financial Management MCQ 114

Question 192.
Equity dividend expected at the end of year is 20 per share whereas anticipated dividend growth rate is 5%. Corporate tax is 30%. Market price per share is 200. What is cost of equity?
(A) 10.5%
(B) 15%
(C) 12.9%
(D) 14%
Answer:
(B) 15%

Question 193.
Dividend per share is 15 and sell it for 120 and floatation cost is 3, then component cost of preferred stock will be – ………………
(A) 12.82 times
(B) 0.l282tirnes
(C) 0.1282
(D) 12.82
Answer:
(C) 0.1282

Question 194.
If future return on common stock is 19% and rate on T-bill is 11% then current market risk premium will be:
(A) 30%
(B) 8%
(C) 0.8
(D) None of the above
Answer:
(B) 8%

Question 195.
Stock selling price is 65, expected dividend is 20 and cost of common stock is 42% then expected growth rate will be –
(A) 11.23%
(B) 0.01123
(C) 11.23 times
(D) 11.23
Answer:
(A) 11.23%

Question 196.
Dividend per share is 18 and sell it for 122 and floatation cost is 4, then component cost of preferred stock will be:
(A) 1525%
(B) 1525 times
(C) 0.01525
(D) 15.52%
Answer:
(A) 1525%

Question 197.
Stock selling price is 45, an expected dividend is 10 per share and an expected growth rate is 8%, then cost of common stock would be:
(A) 3.02
(B) 32%
(C) 3022%
(D) 32.30%
Answer:
(C) 3022%

Question 198.
Interest rate is 12% and tax savings (1-0.40) then after-tax component cost of debt will be –
(A) 0.072
(B) 7.2 times
(C) 17.14
(D) 17.14times
Answer:
(A) 0.072

Question 199.
Cost of common stock is 14% and bond risk premium is 9% then bond yield will be –
(A) 0.0156
(B) 0.05
(C) 0.23
(D) 0.6428
Answer:
(B) 0.05

Question 200.
Cost of common stock is 16% and bond yield is 9% then bond risk premium would be-
(A) 0.07
(B) 7.0
(C) 0.0178
(D) 0.25
Answer:
(A) 0.07