Question

1. How can you maximize the value of your firm?

A) Carry out all available investment projects;

B) Maximize long-run cash flows and minimize the cost of capital;

C) Maximize profits;

2. A firm should generally require the rate of return from a new project to be:

A) equal to its cost of capital.

B) less than its cost of capital.

C) greater than its cost of capital.

D) none of the above.

D) Maximize future cash flows at any cost.

3. A firm’s cost of capital is related to:

A) depreciation.

B) costs of goods sold.

C) overhead and administrative expenses.

D) the rate of return required by the firm’s investors.

4. According to the CAPM, the only factor that determines the rate of return investors expect from an asset is:

A) the risk of the market.

B) the risk-free rate of return and the market return.

C) the worth of the asset.

D) the risk of the asset.

Answer 1

1. One can maximize the value of firm by maximizing cash flows and minimising the cost associated with company as it will help in More net cash available to company which will maximize the value of company.

So correct option would be B) Maximize long-run cash flows and minimize the cost of capital.

2. A project rate of return must exceed the cost of capital in order to get accepted as it will help adding value to firm by increasing cash inflows.

So correct option would be (C) greater than cost of capital.

3. A firm cost of capital is related to rate of return which is required by investors.

So correct option would be (D)the rate of return required by the firm’s investors.

4. According to the CAPM, the only factor that determines the rate of return investors expect from an asset is risk premium associated with the assets which is the difference between market rate or return and risk free asset.

So correct option would be (B)