Financial Management MCQ
Cost of Capital MCQ
Multiple Choice Questions and Answers
1. Cost of capital is the minimum rate of return expected by its investors.
- Given statement is true
- Given statement is false
- Given statement is true in some cases
- Given statement is unreasonable
Answer :- Given statement is true
2. Cost of capital does not mean:
- Cut off rate decided by management
- Rate of interest
- Expectations of investors for dividend
- Money paid to SEBI for permission to acquire capital
Answer :- Cut off rate decided by management
3. Which of the following statements are false?
- Retained earnings do not involve any cost.
- Composite cost refers to sum of cost of equity and cost of debt.
- According to traditional approach, cost of capital is affected by debt-equity mix.
- All of the above
Answer :- All of the above
4. What are the considerations in designing capital structure of a corporate?
- Trading on Equity
- Cost of capital
- Profitability
- All of the above
Answer :- All of the above
5. MATCH THE FOLLOWING
a)Â Â Â Â Interest is deductible expenses b)Â Â Â Realised yield approach c)Â Â Â Â Extended yield approach d)Â Â Â Dividend capitalization approach |
1)Â Â Â Â Â Â Cost of debt capital 2)Â Â Â Â Â Â Cost of equity capital 3)Â Â Â Â Â Â Retained earnings 4)Â Â Â Â Â Â Cost of Preference share capital |
6. Which one of the following is not used to estimate cost of equity capital?
- External yield criterion
- Dividend plus growth rate
- Equity capitalisation approach
- Capital assets pricing model
Answer :- External yield criterion
7. Which of the following is correct for RADR?
- Accept a project if NPV at RADR is negative
- Accept a project if IRR is more than RADR
- RADR is overall cost of capital plus risk-premium
- All of the above.
Answer :- RADR is overall cost of capital plus risk-premium
8. Cost of Capital refers to:
- Flotation Cost
- Dividend
- Minimum Required Rate of Return
- None of the above.
Answer :- Minimum Required Rate of Return
9. Cost of capital is highest in case of:
- Debt
- Equity
- Loans
- Bonds
Answer :- Equity
10. Which of the following has an Implicit Cost of Capital?
- Equity Share Capital
- Preference Share Capital
- Debentures
- Retained earnings.
Answer :- Retained earnings
11. Which of the following is false?
- Retained earnings are cost free
- External Equity is cheaper than Internal Equity
- Retained Earnings are costlier than External Equity.
- All of the above
Answer :- All of the above
12. Minimum Rate of Return that a firm must earn in order to satisfy its investors, is also known as:
- Average Return on Investment
- Weighted Average Cost of Capital
- Net Profit Ratio
- Average Cost of borrowing.
Answer :- Weighted Average Cost of Capital
13. Cost of capital is lowest in case of:
- Debt
- Equity
- Loans
- Bonds
Answer :- Debt
14. Cost of capital is lowest in case of debt is due to:
- Low rate of interest
- Time value of money
- Tax-deductibility of interest
- All of the above
Answer :- Tax-deductibility of interest
15. In order to find out cost of equity capital under CAPM, which of the following is not required:
- Beta of the stock
- Market Rate of Return
- Market Price of Equity Share
- Risk-free Rate of Interest.
Answer :- Market Price of Equity Share
16. Interest on government bonds is also known as:
- Beta of the stock
- Market Rate of Return
- Market Price of Equity Share
- Risk-free Rate of Interest.
Answer :- Risk-free Rate of Interest.
17. Cost of issue of new shares is known as:
- Cost of Equity
- Cost of debt
- Flotation Cost
- WACC
Answer :- Flotation Cost
18. Which of the following method is not used for Calculation of Cost of Equity?
- Dividend yield approach
- CAPM
- Rate of Pref. Dividend plus Risk
- Price-Earnings Ratio.
Answer :- Rate of Pref. Dividend plus Risk
19. Cost of Equity Share Capital is more than cost of debt because:
- Equity shares are highly liquid.
- Equity shares have higher risk than debt,
- Market price of equity is highly volatile
- Face value of equity is less than debentures.
Answer :- Equity shares have higher risk than debt,
20. Key advantages of financing through debentures and bonds are:
- It reduces tax liability
- It reduces WACC
- It does not dilute control of owners
- All of the above.
Answer :- All of the above.