Cost of Capital MCQ: Multiple Choice Questions and Answers


Financial Management MCQ

Cost of Capital MCQ

Mention Below are the MCQ on cost of capital chapter of financial management. With this MCQ you can understand the cost of capital easily and you can also prepare for your exam and competitive exam.

1. Cost of capital is the minimum rate of return expected by its investors.

a)    Given statement is true

b)   Given statement is false

c)    Given statement is true in some cases

d)   Given statement is unreasonable

2. Cost of capital does not mean:

a)    Cut off rate decided by management

b)   Rate of interest

c)    Expectations of investors for dividend

d)   Money paid to SEBI for permission to acquire capital

3. Which of the following statements are false?

a)    Retained earnings do not involve any cost.

b)   Composite cost refers to sum of cost of equity and cost of debt.

c)    According to traditional approach, cost of capital is affected by debt-equity mix.

d)   All of the above

4. What are the considerations in designing capital structure of a corporate?

a)    Trading on Equity

b)   Cost of capital

c)    Profitability

d)   All of the above

a)    Interest is deductible expenses

b)   Realised yield approach

c)    Extended yield approach

d)   Dividend capitalization approach

1)      Cost of debt capital

2)      Cost of equity capital

3)      Retained earnings

4)      Cost of Preference share capital

6. Which one of the following is not used to estimate cost of equity capital?

a)    External yield criterion

b)   Dividend plus growth rate

c)    Equity capitalisation approach

d)   Capital assets pricing model

7. Which of the following is correct for RADR?

a)    Accept a project if NPV at RADR is negative

b)   Accept a project if IRR is more than RADR

c)    RADR is overall cost of capital plus risk-premium

d)   All of the above.

8. Cost of Capital refers to:

a)    Flotation Cost

b)   Dividend

c)    Minimum Required Rate of Return

d)   None of the above.

9. Cost of capital is highest in case of:

a)    Debt

b)   Equity

c)    Loans

d)   Bonds

10. Which of the following has an Implicit Cost of Capital?

a)    Equity Share Capital

b)   Preference Share Capital

c)    Debentures

d)   Retained earnings.

11. Which of the following is false?

a)    Retained earnings are cost free

b)   External Equity is cheaper than Internal Equity

c)    Retained Earnings are costlier than External Equity.

d)   All of the above

12. Minimum Rate of Return that a firm must earn in order to satisfy its investors, is also known as:

a)    Average Return on Investment

b)   Weighted Average Cost of Capital

c)    Net Profit Ratio

d)   Average Cost of borrowing.

13. Cost of capital is lowest in case of:

a)    Debt

b)   Equity

c)    Loans

d)   Bonds

14. Cost of capital is lowest in case of debt is due to:

a)    Low rate of interest

b)   Time value of money

c)    Tax-deductibility of interest

d)   All of the above

15. In order to find out cost of equity capital under CAPM, which of the following is not required:

a) Beta of the stock

b) Market Rate of Return

c) Market Price of Equity Share

d) Risk-free Rate of Interest.

16. Interest on government bonds is also known as:

a) Beta of the stock

b) Market Rate of Return

c) Market Price of Equity Share

d) Risk-free Rate of Interest.

17. Cost of issue of new shares is known as:

a)    Cost of Equity

b)   Cost of debt

c)    Flotation Cost

d)   WACC

18. Which of the following method is not used for Calculation of Cost of Equity?

a)    Dividend yield approach

b)   CAPM

c)    Rate of Pref. Dividend plus Risk

d)   Price-Earnings Ratio.

19. Cost of Equity Share Capital is more than cost of debt because:

a)    Equity shares are highly liquid.

b)   Equity shares have higher risk than debt,

c)    Market price of equity is highly volatile

d)   Face value of equity is less than debentures.

20. Key advantages of financing through debentures and bonds are:

a) It reduces tax liability

b) It reduces WACC

c) It does not dilute control of owners

d) All of the above.