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CMA (IMA) Cost of Capital — practice questions

Explore 28 free Cost of Capital questions in CMA (IMA) Finance. Open each question or exercise to read its content, reference answers and available explanation.

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Cost of Capital questions and exercises with answers

Showing questions 1–28 of 28.

A company can pay for its assets in two ways. One is equity financing and the other is:Read the answer and worked solution →The average of a firm's debt and equity costs, weighted by their share of firm value, is the:Read the answer and worked solution →The weights used in that average are the proportions of debt and equity in the firm's:Read the answer and worked solution →A firm's cost of debt is described as the interest rate it would have to pay to do what with its existing debt?Read the answer and worked solution →Interest is deductible, so the true cost of borrowing to the firm is the:Read the answer and worked solution →Because interest reduces the tax bill, firms are encouraged to borrow. That effect is the interest:Read the answer and worked solution →Unlike the cost of debt, the cost of common stock capital cannot be observed directly. It must instead be:Read the answer and worked solution →Two primary methods estimate that cost: the constant dividend growth model and the:Read the answer and worked solution →A firm has an equity beta of 1.3. Compared with the average stock, its systematic risk is:Read the answer and worked solution →An analyst needs a proxy for the risk-free rate and turns to the yield on:Read the answer and worked solution →Using that model requires assumptions about beta, the risk-free rate and the market:Read the answer and worked solution →To estimate that premium, analysts look at:Read the answer and worked solution →Issuing new shares brings extra expenses for SEC filing and investment banker fees. Those are called:Read the answer and worked solution →Because of those costs, the firm does not receive the full price investors pay. The amount available to finance assets is therefore:Read the answer and worked solution →The debt a firm chooses to use is often referred to as financial:Read the answer and worked solution →If a company fails, claims are settled in a fixed order. First in line are the:Read the answer and worked solution →Unlike a dividend on common equity, the dividend on preferred stock is:Read the answer and worked solution →Preferred shareholders differ from lenders in one important respect. They cannot force the company into:Read the answer and worked solution →A theory weighs the advantages of debt against its disadvantages in the capital structure. That theory is:Read the answer and worked solution →As a firm keeps adding leverage, one risk keeps rising. That risk is:Read the answer and worked solution →Catch the cost of capital wordsRead the answer and worked solution →Pop the CAPM inputsRead the answer and worked solution →Run the capital gatesRead the answer and worked solution →Slice the capital wordsRead the answer and worked solution →Debt or equityRead the answer and worked solution →Sort the capital wordsRead the answer and worked solution →Type the numberRead the answer and worked solution →Cost of capital bingoRead the answer and worked solution →

Worked practice questions

A company can pay for its assets in two ways. One is equity financing and the other is:

  1. Debt financing
  2. Barter financing
  3. Rent financing
  4. Grant financing
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Correct answer: A. Debt financing

1. Two sources appear on the balance sheet. 2. One of them is borrowed money. 3. It is debt financing. _Source: OpenStax Principles of Finance 2e, Chapter 17, How Firms Raise Capital._

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The average of a firm's debt and equity costs, weighted by their share of firm value, is the:

  1. Current ratio
  2. Weighted cost
  3. Gross margin
  4. Equity return
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Correct answer: B. Weighted cost

1. Both sources are averaged. 2. The weights come from firm value. 3. It is the weighted cost of capital. _Source: OpenStax Principles of Finance 2e, Chapter 17, How Firms Raise Capital._

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The weights used in that average are the proportions of debt and equity in the firm's:

  1. Capital structure
  2. Delivery routing
  3. Sales mix plan
  4. Staff roster plan
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Correct answer: A. Capital structure

1. The mix of funding is meant. 2. Debt and equity make it up. 3. It is the capital structure. _Source: OpenStax Principles of Finance 2e, Chapter 17, How Firms Raise Capital._

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