Unit 2: Sources of Finance and Cost of Capital - Practice Quiz

FIN212 — Basic Financial Management 50 Questions
0 Correct 0 Wrong 50 Left
0/50

1 Which of the following is strictly a short-term source of finance?

A. Equity Share Capital
B. Preference Shares
C. Debentures
D. Trade Credit

2 Financial leases are classified as which type of source of finance based on duration?

A. Spontaneous source
B. Overnight source
C. Medium to Long-term source
D. Short-term source

3 In the context of sources of finance, what does ADR stand for?

A. Annual Dividend Rate
B. American Depository Receipt
C. Authorized Debt Ratio
D. Asset Depreciation Reserve

4 Which of the following is an internal source of long-term finance?

A. Retained Earnings
B. Factoring
C. Bank Loan
D. Public Deposits

5 Commercial Paper (CP) is an unsecured money market instrument issued in the form of:

A. Bill of Lading
B. Mortgage Deed
C. Equity Warrant
D. Promissory Note

6 The Cost of Capital is best defined as:

A. The maximum rate of return a firm must earn
B. The minimum required rate of return to maintain the market value of the firm
C. The interest rate charged by the bank on overdrafts
D. The total administrative cost of issuing shares

7 Which component of capital structure usually has the lowest cost due to tax deductibility?

A. Retained Earnings
B. Debt Capital
C. Equity Capital
D. Preference Capital

8 The formula for the Cost of Irredeemable Debt () after tax is:

A.
B.
C.
D.

9 If a company issues 10% debentures of $100,000 at par and the tax rate is 30%, what is the after-tax cost of debt?

A. 7%
B. 10%
C. 3%
D. 13%

10 Which of the following creates a 'Tax Shield'?

A. Interest on Debentures
B. Dividend on Equity Shares
C. Retained Earnings
D. Dividend on Preference Shares

11 The cost of preference share capital () is generally calculated as:

A.
B.
C.
D.

12 Which of the following statements regarding the Cost of Equity () is TRUE?

A. It is the most expensive source of finance because of higher risk.
B. It carries a legal obligation to pay.
C. It is usually lower than the cost of debt.
D. It is tax-deductible.

13 In the Dividend Price Approach (constant dividend), the Cost of Equity () is:

A.
B.
C.
D.

14 Under the Dividend Growth Model (Gordon's Model), the formula for Cost of Equity is:

A.
B.
C.
D.

15 In the formula , what does represent?

A. Gearing ratio
B. Growth rate of dividends
C. Gross profit margin
D. Government tax rate

16 The Capital Asset Pricing Model (CAPM) calculates the cost of equity based on:

A. Past dividend trends only
B. Risk-free rate, Market return, and Beta
C. Interest coverage ratio
D. Book value of assets

17 According to CAPM, the formula for Cost of Equity is:

A.
B.
C.
D.

18 What does 'Beta' () measure in the CAPM model?

A. Unsystematic risk
B. Liquidity risk
C. Systematic (Market) risk
D. Credit risk

19 The Cost of Retained Earnings () is usually considered equal to:

A. Risk-free rate
B. Cost of Equity ()
C. Cost of Debt
D. Zero

20 Why is the Cost of New Equity () typically higher than the Cost of Retained Earnings ()?

A. They are always exactly the same
B. Due to tax advantages
C. Due to flotation costs
D. Due to lower risk

21 WACC stands for:

A. Working Assets Cost Capital
B. Weighted Annual Cost of Capital
C. Weighted Average Cost of Capital
D. Weighted Average Credit Cost

22 To calculate WACC, the specific costs of each source of finance are weighted by their:

A. Proportion in the capital structure
B. Profitability index
C. Coupon rate
D. Maturity period

23 Which weights are generally preferred for calculating WACC?

A. Par Value Weights
B. Book Value Weights
C. Historical Cost Weights
D. Market Value Weights

24 Factoring is a method of raising short-term finance against:

A. Accounts Receivable / Debtors
B. Goodwill
C. Inventory
D. Fixed Assets

25 Which of the following is NOT a component of Cost of Capital?

A. Business risk premium
B. Sunk costs
C. Risk-free rate
D. Financial risk premium

26 If , , and , what is using CAPM?

A. 17.0%
B. 15.5%
C. 10.5%
D. 23.0%

27 Venture Capital is best described as:

A. Safe investment in blue-chip companies
B. Short-term loan for working capital
C. Government subsidy for agriculture
D. Financing for high-risk, high-growth startup potential

28 In the calculation of Cost of Redeemable Debt, the term 'Redemption Value' refers to:

A. The price at which the bond was issued
B. The market price today
C. The amount repayable at maturity
D. The total interest paid over the life

29 Which source of finance does not dilute the control of existing shareholders?

A. Convertible Preference Shares
B. Warrants
C. New Equity Issue
D. Debentures

30 A Global Depository Receipt (GDR) is usually issued in:

A. The company's headquarters
B. USA only
C. India only
D. European markets / Internationally outside the domestic market

31 The approximate formula for Cost of Redeemable Debt involves averaging:

A. Risk and Return
B. Net Proceeds and Redemption Value
C. Interest and Tax
D. Growth and Dividend

32 For a profit-making company, the 'Effective Cost' of debt is:

A. Equal to the risk-free rate
B. Higher than the coupon rate
C. Equal to the coupon rate
D. Lower than the coupon rate

33 If the current market price of a share is $50 and the expected dividend is $5 with no growth, the Cost of Equity is:

A. 5%
B. 10%
C. 20%
D. 15%

34 The 'Realized Yield Approach' for calculating Cost of Equity is based on:

A. Future expectations
B. Historical returns actually earned by shareholders
C. Government bond yields
D. Fixed deposit rates

35 When calculating WACC, if the capital structure changes, what happens?

A. Only the cost of equity changes
B. The weights change, likely altering the WACC
C. Only the cost of debt changes
D. The WACC remains constant

36 Term loans provided by financial institutions are typically for:

A. Indefinite period
B. 3 to 10 years or more
C. Overnight only
D. Less than 1 year

37 What is the primary difference between 'Cum-dividend' and 'Ex-dividend' price when calculating Cost of Equity?

A. There is no difference.
B. Cum-dividend includes the right to receive the declared dividend; Ex-dividend does not.
C. Ex-dividend is always higher than Cum-dividend.
D. Cum-dividend is for debt; Ex-dividend is for equity.

38 In the WACC calculation , what does represent?

A. Weight of Debt
B. Weight of Dividend
C. Weighted Depreciation
D. World Debt Index

39 Which of the following creates a 'Fixed Financial Charge' for a company?

A. Retained Earnings
B. Trade Creditors
C. Long-term Debt
D. Equity Capital

40 If a company has a Beta of 0, its expected return should theoretically equal:

A. The Risk-Free Rate ()
B. Zero
C. The Market Return ()
D. The Inflation Rate

41 Lease financing where the lessor maintains the asset and the lease is short-term is called:

A. Leveraged Lease
B. Sale and Leaseback
C. Operating Lease
D. Financial Lease

42 The marginal cost of capital is:

A. The cost of the cheapest source available
B. The cost of raising one additional unit of new capital
C. The cost of debt only
D. The average cost of existing capital

43 Which of the following is a feature of Preference Shares?

A. Unlimited voting rights
B. No claim on assets during liquidation
C. Tax-deductible dividends
D. Fixed rate of dividend

44 The explicit cost of Retained Earnings is zero. This statement is:

A. True only for private companies
B. Depends on the tax rate
C. False
D. True

45 If flotation costs are 5%, and the market price of a share is NP$) used in the $K_e$ calculation for new shares?

A. $20
B. $21
C. $1
D. $19

46 A bond that is issued at a deep discount and pays no interest during its life is called a:

A. Floating Rate Bond
B. Zero Coupon Bond
C. Junk Bond
D. Convertible Bond

47 In the context of WACC, as the Debt-to-Equity ratio increases significantly, the Cost of Equity () typically:

A. Remains constant
B. Decreases
C. Increases
D. Becomes zero

48 What is 'Ploughing Back of Profits'?

A. Retaining earnings for internal financing
B. Paying dividends
C. Buying back shares
D. Returning capital to shareholders

49 Which of the following is considered a 'hybrid' security?

A. Preference Shares
B. Common Stock
C. Bank Overdraft
D. Trade Credit

50 The primary significance of calculating the Weighted Average Cost of Capital (WACC) is to:

A. Determine the marketing budget
B. Calculate tax liability
C. Serve as a benchmark for accepting or rejecting investment projects
D. Determine the salary of the CFO