Multiple Choice Answers

One function of the cost of capital is to ________ for the firm.
A) determine the debt to equity ratio
B) value future cash flows
C) determine the current ratio
D) determine the current lending rate

When computing the weighted average cost of capital, the weighting should be proportional based on the ______ rather than the _____ value of the firm.
A) book, market
B) hypothetical, book
C) market, analyst’s
D) market, book

Suppose that a foreign project has a beta of 1.12, the risk free return is 9.3% and the required return on the market is estimated at 18%. Then the cost of capital for the project is
A) 17.21%
B) 21.37%
C) 19.04%
D) 20.03%

Cost of capital = 9.3% + 1.12(18.0% – 9.3%) = 9.3% + 9.74% =  19.04%

The cost of capital for a project in Spain should
A) equal the parent’s weighted average cost of capital
B) equal the required return for a similar investment in the U.S.
C) equal the minimum rate of return necessary to induce investors to buy or hold the firm’s stock
D) be a function of the riskiness of the project itself

The efficient frontier is the set of portfolios that has the ________ standard deviation for its level of expected return.
A) smallest possible
B) greatest possible
C) most feasible
D) least correlated

The difference between a global fund and an international fund is the global fund
A) invests anywhere in the world excluding the United States
B) invests anywhere in the world including the United States
C) invests only outside the United States
D) invests in individual countries

Systematic risk refers to
A) The risk that remains even after investors fully diversify their portfolio holdings.
B) The risk that unanticipated changes in the exchange rate may reduce the diversification potential of international investing.
C) The increase in risk that international diversification offers to domestic portfolios.
D) None of the above

Other things equal, a country will be perceived to have more political risk
A) The less integrated it is into the world system
B) The more stable a country’s government is.
C) The more stable its neighboring countries are.
D) With lessening income inequality.