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Cost of capital and capital structure

Quiz by Kate Angel Elleso

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10 questions
Show answers
  • Q1
    What is the primary purpose of calculating the cost of capital for a firm?
    To calculate tax liabilities
    To evaluate investment opportunities
    To determine employee salaries
    To set prices for products
    30s
  • Q2
    Which of the following components is considered part of a company's capital structure?
    Customer satisfaction
    Debt
    Employee turnover
    Market share
    30s
  • Q3
    What is the WACC (Weighted Average Cost of Capital) used for?
    To analyze customer demographic data
    To calculate the total revenue of a company
    To assess the average cost of financing a firm's assets
    To determine the profit margins of products
    30s
  • Q4
    How does increasing debt in a company's capital structure typically affect its overall cost of capital?
    It has no effect on the overall cost of capital
    It always increases the overall cost of capital
    It makes the overall cost of capital unpredictable
    It may lower the overall cost of capital initially
    30s
  • Q5
    What is the significance of the cost of equity in a firm's capital structure?
    It determines the company's market share
    It reflects the return required by shareholders
    It is used to calculate employee wages
    It measures production efficiency
    30s
  • Q6
    What effect does a higher risk of a business typically have on its cost of capital?
    It decreases the cost of capital
    It makes the cost of capital fixed
    It has no effect on the cost of capital
    It increases the cost of capital
    30s
  • Q7
    Which formula is commonly used to calculate the cost of equity?
    DOL (Degree of Operating Leverage)
    ROE (Return on Equity)
    CAPM (Capital Asset Pricing Model)
    P/E Ratio (Price to Earnings Ratio)
    30s
  • Q8
    What is the primary advantage of using debt in a company's capital structure?
    Interest on debt is tax-deductible
    Debt has lower risk than equity
    Debt does not require repayment
    Debt increases company ownership
    30s
  • Q9
    What is the primary role of the cost of capital in investment decision-making?
    To benchmark the minimum acceptable return on investments
    To assess employee performance
    To estimate future cash flows
    To determine the price of shares
    30s
  • Q10
    How does a firm's capital structure impact its financial risk?
    A balanced capital structure reduces financial risk
    It has no effect on financial risk
    A higher proportion of equity increases financial risk
    A higher proportion of debt increases financial risk
    30s

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