mcq

1. If a firm just paid a dividend equal to $4.00 a share, then for the WACC, in order to find the cost of equity, $4 should be: (Points : 1)

Divided by the current price of the stock, and the quotient should be added to the dividend growth rate.

Divided by the current price of the stock.

Multiplied by one minus the tax rate, and the difference divided by the current price of the stock.

Multiplied by the sum of one plus the growth rate, and then divided by the current price of the stock; this quotient should be added to the dividend growth rate.

2. The financing mix reflected in the WACC should: (Points : 1)

Reflect the desired mix and not necessarily the mix being used to finance a specific project.

Vary from project to project, depending on how they are financed.

Always reflect the firm’s current capital structure.

None of these answers is correct.

3. In the Capital Asset Pricing Model, the market risk premium is best approximated by: (Points : 1)

The most recent one-year return on the S&P 500 Index (or another market index).

The long-term historic return on a stock market index such as the S&P 500 (or another market index).

The long-term average spread of the S&P 500 (or another market index) over the yield of long-term government bonds.

The return of the S&P 500 (or another market index) over the current yield of long-term government bonds.

 

4. Which of the following statements regarding the cost of equity is true? (Points : 1)

It can be estimated in three different ways.

It is always estimated using the present value of future dividends approach.

It is estimated by solving for the discount rate for a perpetuity.

It is generally lower than the cost of debt because equity holders are paid after taxes are paid.