1. What is long-term capital?

A. total debt + shareholders' equity

B. long-term debt + shareholders' equity

C. long-term debt + retained earnings

2. Your firm intends to reduce its long-term debt to 20% of long-term capital. Given a 28.0% tax rate and an unlevered beta of 1.22, what is the new beta likely to be once debt is reduced?

A. about 1.22

B. about 1.44

C. about 0.22

3. Using the capital asset pricing model, and the information provided below, what is a good estimate for the cost of equity capital?

YTM on five-year US Treasury note = 0.022

Five-year average annual return on S&P 500 = 0.078

Percent of equity in company's long-term capital structure = 0.34

Your company's current stock beta = 1.8

4. What is the year 7 depreciation factor for a capital budgeting project using a 7-year MACRS schedule?

a. 1/7 = 0.14286

b. 0.06550

c. 0.08930

5. The chance that operating income declines due to increased competition is an example of increased...

A. business risk.

B. financial leverage.

C. financial risk.