1. The cost of capital is:

A) the return on the overall market.

B) another term for the risk-free rate of return.

C) the minimum required return on a new investment.

D) another term for the market risk premium.

2. Utah Co. has a beat of 1.4. If the risk free rate is 2% and the market return is 10%, what is Utah Co’s cost of equity assume CAPM?

A) 13.2%

B) 15.6%

C) 16.0%

D) 14.5%

3. Which one of the following will decrease the after-tax cost of debt for a firm?

A) an increase in tax rates

B) an increase in the risk level of the firm

C) an increase in the risk-free rate of return

D) changing the firm's bond rating from A to B

4. Unsystematic risk:

I. is also called unique risk.

II. is also called firm-specific risk.

III. affects a limited number of assets.

IV. affects a large number of assets.

A) I, II, and III only

B) I and III only

C) II and IV only

D) I and IV only

5. The beta of the market is

A) -1

B) 0.5

C) 1

D) 0

6. Maine Company is financed by $4 million in debt, $2 million in preferred stocks, and $6 million in common stocks. The pre-tax cost of debt is 6%, the cost of preferred stock is 8%, and the cost of equity is 12%. Calculate the weighted average cost of capital. Assume 30% tax rate.

A)9.60%

B) 8.73%

C) 7.26%

D) 6.29%