Question

1 - What is economic cost?

A) The opportunity cost less the explicit costs

B) The same as opportunity cost

C) The total of all explicit and implicit costs

D) The total revenue less total costs

2- Why is equity capital generally more expensive than debtfinancing?

A) Dividends fluctuate more than interest rates.

B) Interest on bonds is a legal obligation.

C) Investors expect to be paid more for exposure to higherrisk.

D) Investors have a greater demand for equity investments thanfor debt investments.

3 - An appropriate level of working capital is determined by

A) Balancing the probability of insolvency against theprofitability of current assets and liabilities.

B) Evaluating the capital structure and dividend policy.

C) Evaluating the capital leases used to finance fixedassets.

D) Minimizing long-term debt because it is more expensive thanshort-term debt.

4 - Which of the following objectives is consistent with anoptimal capital structure?

A) Maximize earnings per share

B) Maximize the total value of the entity

C) Minimize the cost of debt

D) Minimize the cost of equity

5 - Lemur Company’s $10 par value common stock currently sellsat $100 per share. Lemur has retained earnings of $100,000; oncethis is exhausted, Lemur will raise any more necessary equitycapital through a stock issue. Lemur can raise cash by sellingcommon stock at a $2 per share discount with a $3 per sharefloatation cost. Annual cash dividends are $7 per share and are notexpected to change. The estimated after-tax cost of funds raised bylong-term bonds is 5%. The estimated cost of funds raised bypreferred stock is 6%. Lemur’s preferred capital structure is 30%long-term debt, 20% preferred stock, and 50% common stock. Notcounting the $100,000 of retained earnings, the current capitalstructure is Lemur’s preferred structure. What would be Lemur’scost of funds from a common stock sale?

A) 7.00%

B) 7.14%

C) 7.22%

D) 7.37%

6 - Aardvark Company’s beta coefficient is 1.2. The currentrates for U.S. treasury bonds and expected corporate returns are 7%and 12%, respectively. What is Aardvark’s approximate expected rateof return using the capital asset pricing model (CAPM)?

A) 8.4%

B) 10.6%

C) 13.0%

D) 14.4%

7- Controllable revenues would be included in the performancereports of which of the following types of responsibilitycenters?

Cost centers ,Investment centers

A) Yes, No

B) Yes, Yes

C) No, No

D) No, Yes

8 - In which of the following situations would there beinelastic demand?

A) A 5 percent price increase results in a 3 percent decrease inthe quantity demanded.

B) A 4 percent price increase results in a 6 percent decrease inthe quantity demanded.

C) A 4 percent price increase results in a 4 percent decrease inthe quantity demanded.

D) A 3 percent price decrease results in a 5 percent increase inthe quantity demanded.