Chapter13Risk,CostofCapital,andCapitalBudgetingAnswerKeyMultipleChoiceQuestions1、Theweightedaverageofthefirm'scostsofequity,preferredstock,andaftertaxdebtisthe:A、rewardtoriskratioforthefirm、B、expectedcapitalgainsyieldforthestock、C、expectedcapitalgainsyieldforthefirm、D、portfoliobetaforthefirm、E、weightedaveragecostofcapital(WACC)、Difficultylevel:EasyTopic:WACCType:DEFINITIONS2、IftheCAPMisusedtoestimatethecostofequitycapital,theexpectedexcessmarketreturnisequaltothe:A、returnonthestockminustheriskfreerate、B、differencebetweenthereturnonthemarketandtheriskfreerate、C、betatimesthemarketriskpremium、D、betatimestheriskfreerate、E、marketrateofreturn、Difficultylevel:EasyTopic:CAPMType:DEFINITIONS3、Thebestfitlineofapairwiseplotofthereturnsofthesecurityagainstthemarketindexreturnsiscalledthe:A、SecurityMarketLine、B、CapitalMarketLine、C、characteristicline、D、riskline、E、Noneoftheabove、Difficultylevel:MediumTopic:CHARACTERISTICLINEType:DEFINITIONS4、Theuseofdebtiscalled:A、operatingleverage、B、productionleverage、C、financialleverage、D、totalassetturnoverrisk、E、businessrisk、Difficultylevel:MediumTopic:USEOFDEBTType:DEFINITIONS5、Theweightedaveragecostofcapitalforafirmisthe:A、discountratewhichthefirmshouldapplytoalloftheprojectsitundertakes、B、overallratewhichthefirmmustearnonitsexistingassetstomaintainthevalueofitsstock、C、ratethefirmshouldexpecttopayonitsnextbondissue、D、maximumratewhichthefirmshouldrequireonanyprojectsitundertakes、E、rateofreturnthatthefirm'spreferredstockholdersshouldexpecttoearnoverthelongterm、Difficultylevel:MediumTopic:WEIGHTEDAVERAGECOSTOFCAPITALType:DEFINITIONS6、TheWACCisusedto_______theexpectedcashflowswhenthefirmhas____________、A、discount;debtandequityinthecapitalstructureB、discount;shorttermfinancingonthebalancesheetC、increase;debtandequityinthecapitalstructureD、decrease;shorttermfinancingonthebalancesheetE、Noneoftheabove、Difficultylevel:MediumTopic:WACCType:CONCEPTS7、UsingtheCAPMtocalculatethecostofcapitalforariskyprojectassumesthat:A、usingthefirm's