MCQs on Cost of Capital

Cost of Capital is the expected returns from a project, based on which the management of an organisation decides to invest in a project. It evaluates the risk of undertaking a particular project, and the expected rate of return on the investment, to determine the feasibility of spending their time and money on it.

Below is a list of multiple-choice questions and answers on the Cost of Capital to help students understand the topic better.

1. The cost of equity share or debt is known as __________.
   1. The specific cost of capital
   2. The related cost of capital
   3. The burden on the shareholder
   4. None of the above

Answer: a

2. Which of the following methods involves computing the cost of capital by dividing the dividend by market price/net proceeds per share?
   1. Adjusted price method
   2. Price earning method
   3. Dividend yield method
   4. Adjusted dividend method

Answer: c

3. In weighted average cost of capital, an organisation can affect its cost of capital through ____________.
   1. The policy of investment
   2. The policy of capital structure
   3. The policy of dividends
   4. All of the above

Answer: d

4. _______ is the rate of return for the most viable investment opportunity for a company that they will forgo by selecting any other project.
   1. Implicit cost
   2. Specific cost
   3. Explicit cost
   4. None of the above

Answer: a

5. What is Marginal Cost?
   1. It is the cost of raising an additional unit of capital
   2. It is the additional cost of capital when the company decides to raise finance for its operations
   3. It is the weighted average cost of raising finance
   4. All of the above

Answer: a

6. Which of the following statements are true?
   1. When the dividends, earnings and the price of an equity share are growing at the same rate, the dividend growth method can compute the cost of equity capital
   2. The risk premium for a stock is arrived at by adding the risk-free rate to the market rate of return
   3. Both a and b are false
   4. Both a and b are true

Answer: d

7. The premium that is considered to be the difference between the current yield on treasury bonds and the expected return on common stock is ___________.
   1. Current risk premium
   2. Past risk premium
   3. Expected premium
   4. None of the above

Answer: a

8. Which among the following figures is not relevant while calculating the cost of the redeemable preference shares?
   1. Earnings per share
   2. Flotation cost
   3. Discount
   4. None of the above

Answer: a

9. Which of the following factors affecting the cost of capital can be controlled by the firm?
   1. Tax rates
   2. Dividend policy
   3. Level of interest rates
   4. All of the above

Answer: b

10. Which of the following is an uncontrollable factor that affects the cost of capital for a firm?
    1. Capital structure policy
    2. Debt service charges
    3. Investment policy
    4. None of the above

Answer: d

11. _________ is the cost that is used to raise the common equity of a firm by reinvestment of the internal earnings.
    1. Cost of reserve assets
    2. Cost of stocks
    3. Cost of mortgage
    4. Cost of common equity

Answer: d

12. Which of the following factors affects the determination of the cost of capital for a firm?
    1. Operating and financing decisions
    2. General economic factors
    3. Market conditions
    4. All of the above

Answer: d

13. The cost of capital for a firm _______.
    1. Is the return required on the total assets of a firm
    2. Refers to the internal rate of return
    3. Varies inversely with the overall cost of debt
    4. None of the above

Answer: a

14. The cost of equity share capital is greater than the cost of debt because __________.
    1. Equity shares carry a higher risk than debts
    2. The face value of equity shares is lower than the face values of debentures in most cases
    3. Equity shares do not provide a fixed dividend rate
    4. Equity shares are not easily saleable

Answer: a

15. The cost of preference share capital is calculated by _________.
    1. Dividing the price per preference share by the fixed dividend per share
    2. Dividing the book value per preference share by the fixed dividend per share
    3. Dividing the price per preference share by the fixed dividend per share and then adding the growth rate
    4. Dividing the price per preference share by the fixed dividend per share and then adding the risk premium

Answer: a

Also See:

• Difference between Over Subscription and Under Subscription of Shares
• Difference between Convertible and Non-Convertible Debentures