Multiple Choice Answers


1. Which of the following is the minimum return a company needs to earn to satisfy all its investors?
C. BASF 2015

2. The equation RP = D/P0 is used to determine the
A. cost of a bond.
B. cost of preferred stock.
C. cost of common stock.
D. dividend resulting from one share of stock.

3. The cost of equity can be viewed as the combination of
A. the financial leverage and the cost of capital.
B. corporate taxes and shareholder claims.
C. business risk and financial risk.
D. the weighted average cost of capital and the capital

4. The return that lenders require on a firm’s new borrowing is known as the
A. financial leverage.
B. cost of debt.
C. warrant.
D. cost of equity.

5. The legal proceeding for liquidating or reorganizing a business is called
A. internal financing.
B. financial leveraging.
C. flotation.
D. bankruptcy.

6. When a firm places projects into one of several risk classes and adds or subtracts adjustment factors to or from the WACC, the firm is using the _______ approach.
A. basic
B. subjective
C. objective
D. pure play

7. The dividend growth model approach is one approach to estimating a firm’s
A. cost of equity.
B. financial leverage.
C. conversion value.
D. beta coefficient.

8. A firm that pays few or no dividends and instead provides shareholders with capital gains through an increase in stock values is called a
A. business failure.
B. pure play.
C. leveraged firm.
D. growth firm.

9. If a firm has publicly held debt and measures it cost as the yield to maturity on the outstanding debt, the company rate is
A. critical.
B. (E/V)  RE.
C. low.
D. irrelevant.

10. The cost of capital for a firm that has no debt is called the
A. weighted average cost of capital.
B. financial leverage.
C. interest tax shield.
D. unlevered cost of capital.

11. A procedure in which a failing firm is financially restructured in an attempt to continue operations is called
A. liquidation.
B. tax shielding.
C. reorganization.
D. capital structuring.

12. Issuing stock and using the money to pay off debt is one way a firm
A. restructures.
B. refinances.
C. prepares for bankruptcy.
D. prepares for its IPO

13. In Wall Street language, a company that focuses on only one line of business is called a(n)
A. pure play.
B. unlevered company.
C. growth firm.
D. internally financed firm.

14. The overall return that a company must earn on its existing assets to maintain the value of its stock and to satisfy its owners, creditors, and providers of capital is called the
A. reorganization value.
B. flotation cost.
C. weighted average cost of capital.
D. capital structure.

15. During most cases, when a company files for bankruptcy,
A. the court assigns an unbiased individual to run the company in the interim.
B. the judge prepares a reorganization plan the company must follow.
C. payments to creditors and shareholders are suspended.
D. the “debtor in possession” runs the business.

16. The return that equity investors require on their investment in a firm is called the
A. cost of equity.
B. weighted average cost of capital.
C. capital structure weight.
D. project cost of capital.

17. When a firm raises money by issuing new stocks or bonds, the costs associated with the new stock or bond issues are called the
A. intrinsic value.
B. floor value.
C. strike costs.
D. flotation costs.

18. The run establishing priority of claims during a liquidation is called the
A. reorganization priority list.
B. bankruptcy proceeding rule.
C. absolute priority rule.
D. prepack claims petition.

19. The separate cost of capital in each section of a corporation is called the
A. floor value.
B. divisional cost of capital.
C. capital appreciation.
D. option cost.

20. The situation in which a firm is unable to meet its financial obligations is called
A. technical insolvency.
B. liquidation.
C. reorganization.
D. accounting insolvency.