COST OF CAPITAL
CHAPTER-7
Review Questions...
A. OBJECTIVE TYPEMULTIPLE CHOICE QUESTIONS (1 Mark Questions)
1. State whether each of the following statement is True or False:
(i) The cost of capital is the minimum rate of return expected by its investors.
(ii) Cost of capital is not a cost as such.
(iii) Composite cost refers to the cost of equity and preference share capital.
(iv) Implicit cost is the discount rate which equates the present value of cash inflows with the present value of cash outflows.
(v) Retained earnings do not involve any cost.
[Ans- (i) True; (ii) True; (iii) False; (iv) False; (v) False]
2. Fill in the blanks:
(i) Cost of capital is the _________ rate of return expected by its investors.
(ii)
(iii) According to traditional approach, cost of capital is affected by ___________.
(iv) Cost of retained earnings is the _________ cost of dividends foregone by the shareholders.
[Ans- (i) Minimum; (ii) b, f; (iii) debt-equity mix; (iv) equity capital; (v) opportunity]
3. Select the most appropriate answer:
(i) Cost of capital of a firm is:
(a) The minimum rate of return expected by its investors
(b) The maximum rate of return excepted by its investors.
(c) The marginal cost of above
(d) None of the above
(ii) Weighted average cost of capital is also known as:
(a) Composite cost of capital
(b) Overall cost of capital
(c) Average cost of capital
(d) All of these above
(iii) CAPM stands for:
(a) Cost of Assets Purchased Method
(b) Capital Asset Pricing Model
(c) Cash Assets Pricing Model
(d) None of the above
(iv) Cost of capital is not similar to one of the following:
(a) Cut-off rate
(b) Target rate
(c) Hurdle rate
(d) Internal rate of return
[Ans- (i) (a); (ii) (d); (iii) (b); (iv) (d)]
4. Select the most appropriate answers:
(i) Cost of capital of a firm is:
(a) The maximum rate of return excepted by its investors.
(b) The minimum rate of return excepted by its investors.
(c) Cost of debt capital.
(ii) Weighted cost of capital is also known as
(a) Composite cost of capital.
(b) Cost of preference capital.
(c) Cost of debt capital.
(iii) Cost of equity share capital is:
(a) Zero
(b) Always more than the cost of debt capital.
(c) A function of expected future dividends.
[Ans- (i) (b); (ii) (a); (iii) (c)]
B. SHORT ANSWER TYPE QUESTIONS
1. Define cost of capital.
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2. What is cost of capital.
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3. Specific cost vs. composite cost.
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4. Explain the term cost of capital in 2-3 sentences.
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5. Define cost of equity capital.
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6. What is cost of retained earnings?
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7. What is composite cost ?
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8. Define marginal cost of capital.
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9. Name various methods of computing cost of equity capital.
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10. Write a short note on cost of debt.
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11. Write a very short note on cost of retained earnings.
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12. What is a floating or variable rate debt ?
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13. Write a short note on inflation adjusted cost of debt.
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14. How is the cost of zero coupon bonds determined ?
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15. What do you understand by weighted average cost of capital.
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16. Write a short note on book value and market value weighted average cost of capital.
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17. What is the rationale of after tax weighted average cost of capital ?
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18. Write a short note on significance of cost of capital.
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C. LONG ANSWER TYPE QUESTIONS
1. What is cost of capital ? Explain the significance of cost of capital.
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2. What is the importance of cost of capital ? Discuss the problems in determining it.
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3. What do you understand by explicit cost and implicit cost ? How is the cost of irredeemable debt determined ?
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4. Define the concept of 'cost of capital', State how you would determine the weighted average cost of capital of a firm.
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5. What is meant by cost of capital ? What are the components of cost of capital ? What is the cost of retained earnings ? How is the cost of new equity capital issue determined ?
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6. What is the relevance of cost of capital in capital budgeting and capital structure planning decisions ?
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7. Examine critically the different approaches for computing the cost off equity. Discuss the merits and demerits of each.
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8. Write note on average or composite cost of capital.
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9. Write a detailed note on the cost of individual components of capital.
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10. what is weighted average cost f capital ? Examine the rational behind the use of weighted average cost of capital.
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11. How is the cost of different sources of capital measured ? lllustrate and explain.
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12. Define cost of capital. Explain the significance of cost of capital.
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Questions Type By- Janmoni hazarika
Post ID: DABP002239
