1. Old Town Industries has three divisions. Division X has been in existence the longest and has the most stable sales. Division Y has been in existence for five years and is slightly less risky than the overall firm. Division Z is the research and development side of the business. When allocating funds, the firm should probably:

require the highest rate of return from division X since it has been in existence the longest.

assign the highest cost of capital to division Z because it is most likely the riskiest of the three divisions.

use the firm's WACC as the cost of capital for division Z as it provides analysis for the entire firm.

use the firm's WACC as the cost of capital for divisions A and B because they are part of the revenue-producing operations of the firm.

allocate capital funds evenly amongst the divisions to maintain the current capital structure of the firm.

 

2. Ted is trying to decide what cost of capital he should assign to a project. Which one of the following should be his primary consideration in this decision

Amount of debt used to finance the project

Use, or lack thereof, of preferred stock to finance the project

Mix of funds used to finance the project

Risk level of the project

Length of the project's life

 

3. Lester lent money to The Corner Store by purchasing bonds issued by the store. The rate of return that he and the other lenders require is referred to as the:

pure play cost.

cost of debt.

weighted average cost of capital.

subjective cost.

cost of equity.

 

4. Systematic risk is:

totally eliminated when a portfolio is fully diversified.

defined as the total risk associated with surprise events.

risk that affects a limited number of securities.

measured by beta.

measured by standard deviation