1·The cost of capital can be described best as: A. Rate that a firm pays for the

Question

1·The cost of capital can be described best as: A. Rate that a firm pays for the use of invested funds The minimum return required of capital budgeting projects that are about as risky as the firm B. C. Both A and B D. None of the above 2. For calculating the cost of capital, the capital components are A. Noncurrent liabilities and ordinary shareholders' equity B. Current liabilities, noncurrent liabilities and ordinary shareholders' equity C. Debt, ordinary shareholders' equity and preference shares D. Current liabilities and noncurrent liabilities 3. Generally the return on equity investment is higher than the return on debt or preference shares because A. Equity's risk is higher B. People are more willing to invest in debt C. The cost of preference shares is highest D. None of the above 4, A firm with a before-tax cost of debt of 12% has a 30% tax rate. What is the firm's after- tax cost of debt? A. 12% B. 3.6% C. 8.4% D. 15.6%

Explanation / Answer

1

Only Option A as Option B is not cost of capital but opportunity cost or discount rate and can be different from cost of capital

2

Option C

3

Because of higher risk equities have to give higher return

4

After tax cost of debt=before tax cost of debt*(1-tax rate)=12%*(1-30%)=8.4%

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