Question

1. Which of the following statements is true?
   1. Equity is more costly to raise than debt because IPOs take a long time to organize
   2. Debt is more costly to raise than equity because it is riskier, thereby requiring higher returns
   3. Equity is more costly to raise than debt because it is riskier, thereby requiring higher returns
   4. Debt is more costly to raise than equity because the bond market is illiquid
2. What is the goal of the Firm?
   1. To maximize shareholder value
   2. To only invest in environmentally safe ideas
   3. To employ as many people as possible
   4. To treat all stakeholders equally
3. A lower coefficient of variation means:
   1. Lower returns
   2. Higher volatility
   3. Lower volatility
   4. Each individual return is positive
4. When a project’s NPV = zero, the following is true:
   1. The project satisfies the company’s return requirements
   2. The IRR for the project is equal to the company’s WACC
   3. The discounted cash flows are offset by (or equal to) the initial investment
   4. All of the above
5. When interest rates go up, what will happen to bond prices:
   1. They will go up as well
   2. It depends what is happening in the stock market
   3. They will go down, as existing bonds are less attractive with lower coupons
   4. It depends on the amount of demand in the market for bonds

Answer 1

1)

Equity is riskier than debt in general and as per the risk return trade-off, it is costlier than debt on average and hence more costly to raise.

Answer is C) Equity is more costly to raise than debt because it is riskier, thereby requiring higher returns

2)

A goal of the firm is always to maximize shareholder returns and hence their value.

Answer is a) To maximize shareholder value

3)

Coeffecient of variation is the ratio of standard deviation to its mean and measures the volatility of an asset. Ana sset with lower coeffecient of variation implies lower volatility.

Answer is c) Lower volatility

4)

When an NPV of the project is zero , it means that the IRR of project is equal to the WACC and that the discounted cash flows are offset by the initial investment. This is the minimum return needed for the investment.

Answer is d) All of the above

5)

When interest rates go up, the corresponding coupon rates of the existing bonds also rise, thus making it attracttive to the investors, such that the price on the lower coupon bonds will fall to an equilibrium level.

Answer is c) They will go down, as existing bonds are less attractive with lower coupons