E4 Cost of capital and capital structure

Retention of 40 percent at a return of 15 percent gives what dividend growth rate?

• 1 40%
• 2 55%
• 3 15%
• 4 6%

The next dividend is $0.30, the price is $5.00 and growth is 6 percent. What is the cost of equity using the dividend growth model?

• 1 11%
• 2 12%
• 3 6%
• 4 18%

Which risk is removed by holding a diversified portfolio?

• 1 Interest rate risk
• 2 Systematic risk
• 3 Market risk
• 4 Unsystematic risk

According to CAPM, investors are rewarded for:

• 1 Unsystematic risk
• 2 Total risk
• 3 No risk
• 4 Systematic risk

Preference shares pay a dividend of $6 and trade at $75. What is the cost?

• 1 6%
• 2 75%
• 3 8%
• 4 12.5%

When can WACC be used as the discount rate for a project?

• 1 When the project has the same business risk and does not change the company's financial risk
• 2 Never
• 3 Always
• 4 Only for small projects

According to pecking order theory, what is the first choice of finance?

• 1 Retained earnings
• 2 New equity
• 3 Debt
• 4 Preference shares

According to Modigliani and Miller with tax, value rises with gearing because of:

• 1 Lower risk
• 2 Lower costs
• 3 The tax shield on interest
• 4 Higher dividends