QUIZ BEE

Cost of Capital, Leverage, and Capital Structure

Start Now
GROUP 5 QUIZ BEE

Quiz Categories

BASIC INTERMEDIATE CHALLENGE

1 point each 3 points each 5 points each
(1 MINUTE AND)
(30 SECONDS) (50 SECONDS)
(10 SECONDS)
BASIC
ROUND
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

MULTIPLE CHOICE

QUESTION 1

All of the following describes Cost of Capital EXCEPT ?

A The rate of return a firm must C It is a dynamic concept; it is affected

earn on its investments in order
to leave share price unchanged.
B It reflects the historical cost of
raising funds over the long run.
by economic and firm-specific
factors such as business risk and
financial risk.
D The cost the company must incur
to obtain its capital resources.
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

MULTIPLE CHOICE

QUESTION 2

Which of the following statements best describes why debt is

typically the least expensive source of capital ?

A Secured nature of a debt C Tax deductibility of interest

obligation. payments.

B Its position in the priority of D Fixed interest payments.

claims on assets and earnings
in the event of liquidation.
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

IDENTIFICATION

QUESTION 3

When the _____, or the total costs of issuing and selling the securities,
have been deducted from the total proceeds, the funds actually received
from the sale after it is known as the _____ from the sale of a security.
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

MULTIPLE CHOICE

QUESTION 4

The Capital Asset Pricing Model (CAPM) is used to evaluate the risk-
return relationship on a portfolio of stocks held as investment. Which
would NOT be used to estimate the portfolio’s expected rate of return ?

A Standard deviation of the market C Expected rate of return on the

returns. market portfolio.

B Expected risk premium on the D Interest rate for the safest possible
portfolio of stocks. investment.
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

TRUE OR FALSE

QUESTION 5

I. In a bond issuer’s point of view, the Yield to Maturity (YTM) of a bond

is the Internal Rate of Return (IRR) on cash flows.
II. In an investor’s point of view, a bond’s Cost to Maturity is equal to its
Internal Rate of Return (IRR) on cash flows.

A Only statement I is correct. C Both statements are correct.

B Only statement II is correct. D Both statements are incorrect.

COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

IDENTIFICATION

QUESTION 6

The _____ is the possibility that the company won’t be able to pay or cover
its operating costs or running expenditures, on the other hand, the _____
refers to the chance that the company will not be able to pay or cover its
debts or financial obligations.
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

MULTIPLE CHOICE

QUESTION 7

If we suppose that Liuli Pavilion and Xinyue Kiosk are identical in all aspects,
with the exception that Liuli Pavilion uses more debt financing and less equity
financing than does Xinyue Kiosk, which of the following claims is true ?

A Liuli Pavilion has more operating C Liuli Pavilion has more net
earnings variability than Xinyue earnings variability than Xinyue
Kiosk. Kiosk.

B Liuli Pavilion has less operating D Liuli Pavilion has less financial
earnings variability than Xinyue leverage than Xinyue Kiosk.
Kiosk.
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

MULTIPLE CHOICE

QUESTION 8

A company with very high operating leverage can reduce its overall risk
by doing which of the following, given that the Degree of Total Leverage
(DTL) is multiplicative rather than additive ?

A Using a lower level of C Using more Financial

Financial Leverage. Leverage.

B Increasing Sales. D Increasing EBIT.

COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

IDENTIFICATION

QUESTION 9

Instead than focusing on Maximization of _____, the EBIT-EPS

analysis often focuses on Maximization of _____ .
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

MULTIPLE CHOICE

QUESTION 10

Dori, owner of the Palace of Alcazarzaray made the decision to offer

capsules with P75,000 fixed annual operating costs. Dori sells her
capsules at retail for P14.99 apiece, with a variable cost of P4.99 per
capsule. With this data, what is the breakeven sales in units ?

A 7,500 C 5,003

B 15,030 D Wala sa choices

COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

TRUE AND FALSE

QUESTION 11

I. Optimal Capital Structure is at which the weighted average cost of

capital is minimized, which results in maximizing the firm’s value.
II. It balances the return and risk factors in order to maximize profits.

A Only statement I is correct. C Both statements are correct.

B Only statement II is correct. D Both statements are incorrect.

INTERMEDIATE
ROUND
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

MULTIPLE CHOICE

QUESTION 1

Verr Goldet, owner of Wangshu Inn has calculated the costs associated with each of
these sources as well as the optimal capital structure. The following sources of capital
and their relative target market values are displayed in the table below. Solve for the
Weighted Average Cost of Capital.
TARGET MARKET
SOURCES OF CAPITAL AFTER-TAX COST
PROPORTIONS

LONG-TERM DEBT 40% 6%

PREFERRED STOCK 10% 11%

COMMON STOCK EQUITY 50% 15%

A 6% B 15% C 10.7% D 11%

COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

MULTIPLE CHOICE

QUESTION 2

Thoma, a well-known “fixer” in Inazuma currently sells 400,000 fixed pairs of shoes
annually. The cost to create each shoe is P.84, and it retails for P1.00. Annual fixed
costs come to P28,000. Thoma’s annual interest expenses include P6,000, and
P2,000 for dividends on preferred shares, and a 40% tax rate. Solve for the Degree of
Operating Leverage (DOL) and Degree of Financial Leverage (DFL).

A 2.40 ; 1.78 C 1.78 ; 1.35

B 2.13 ; 1.35 D 1.12 ; 2.40

COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

MULTIPLE CHOICE

QUESTION 3

If Thoma did not have preferred shares,

the Degree of Total Leverage (DTL) would ?

A Decrease in proportion to a C Decrease but not be

decrease in Financial Leverage. proportional to the decrease in
Financial Leverage.
B Increase in proportion to a D No change.
decrease in Financial Leverage.
CHALLENGE
ROUND
 COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

SUPPLY THE ANSWER

QUESTION 1

Margaret, owner of Cat’s Tail Tavern is looking into two plans, in need of P1 million of financing,
the table below illustrates the plans. Margaret anticipates earning P500,000 in sales revenue,
P200,000 in cost of sales, and P100,000 in general administrative expenses in its first year of
business. There are no other items on the income statement, and the tax rate is 30%. All
earnings are paid out as dividends at year end.
Before-Tax
Plan Equity Debt
Cost of Debt

#1 P700,000 P300,000 8% per annum

#2 P300,000 P700,000 10% per annum

If the Cost of Equity is 12% , the weighted-average cost of capital (WACC) under plan #1
would be ? (round off to the nearest full percentage point)
Under financing plan #2, the Degree of Financial Leverage (DFL) would be ?
(Round off to two decimal places)
COST OF CAPITAL, LEVERAGE, AND CAPITAL STRUCTURE QUIZ BEE

SUPPLY THE ANSWER

QUESTION 2

Dawn Winery’s common stock has a beta of .95 and it currently has no debt. A shift in
the capital structure to 30% debt and 70% equity is being considered by the owner,
Diluc. With this adjustment, the stock's beta would rise to 1.05 and the after-tax cost
of debt would be 7.5%. The risk-free rate is 6% and the expected return on equity is
16%.

Should Diluc, owner of Dawn Winery proceed with changing the capital structure?

Indicate if Yes or No, increase or decrease in what? And show computed answer(s).
 THANK YOU!

COST OF CAPITAL, LEVERAGE,

AND CAPITAL STRUCTURE
(QUIZ BEE)
GRP 5: END OF QUIZ.