Cost of Capital-10 Question to check your knowledge!
The cost of capital is a term used in the field of financial investment to refer to the cost of a company’s funds (both debt and equity), or, from an investor’s point of view “the shareholder’s required return on a portfolio company’s existing securities”. It is is used to evaluate new projects of a company and it is the minimum return that investors expect for providing capital to the company.
Cost of capital is an integral part of investment decision as it is used to measure the worth of investment proposal provided by the business concern. It is used as a discount rate in determining the present value of future cash flows associated with capital projects. It is also called as cut-off rate, target rate, hurdle rate and required rate of return.
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- Question 1 of 9
1. Question1 points
Cost of equity isCorrect
Cost of equity is always more than net borrowing cost.Incorrect
- Question 2 of 9
2. Question1 points
In weighted average cost of capital, the company can affect its capital cost throughCorrect
In weighted average cost of capital method, all factors with their respective weights are considered.Incorrect
- Question 3 of 9
3. Question1 points
Beta equity is positively correlated withCorrect
Beta equity is positively correlated with financial leverage.Incorrect
- Question 4 of 9
4. Question1 points
Cost of debt is calculated after deducting taxCorrect
Cost of debt is calculated after tax because interest payments are tax deductible for the firm.Incorrect
- Question 5 of 9
5. Question1 points
While calculating firm’s weighted average cost of capital (WACC) capital structure must be based onCorrect
While calculating firm’s weighted average cost of capital (WACC) capital structure must be based on market value.Incorrect
- Question 6 of 9
6. Question1 points
Systematic risk can be estimated based onCorrect
Systematic risk can be estimated based on fundamental risk factors and historical stock returns.Incorrect
- Question 7 of 9
7. Question1 points
The net present value of a project is equal toCorrect
All options stands correct with regards to net value of the project.Incorrect
- Question 8 of 9
8. Question1 points
Explicit cost is the rate that the firm pays to procure financing.Correct
Explicit cost is the rate that the firm pays to procure financing.Incorrect
- Question 9 of 9
9. Question1 points
The method generally used in estimation of cost of equity isCorrect
Discounted Cash flow method generally used in estimation of cost of equity.Incorrect