Cost of Capital

30 original practice MCQs, 2 marks each. Practice and separate-test stems differ. Standalone drills across the chapter, with a separate case-based test pack.

Original practice, not official ICAI questions or suggested answers. Scores are temporary and not synced to Study Hub. Contract/current-rule/accounting/tax boundaries are included in the review pack.

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FM-C04-P001 · 2 marks

No cash dividend is planned this year. Equity finance therefore costs what?

A. It still has an investor opportunity cost. B. Zero in all circumstances. C. Exactly the current debt coupon. D. Only the issue fee.

Explanation

Correct answer A: It still has an investor opportunity cost.

Forgone alternatives and expected investor returns matter.

FM-C04-P002 · 2 marks

Coupon Rs 12, net proceeds Rs 92, coupon tax 30% fully usable. After-tax perpetual cost?

A. 9.13%. B. 13.04%. C. 12%. D. 8.4%.

Explanation

Correct answer A: 9.13%.

12 x.7/92=9.1304%.

FM-C04-P003 · 2 marks

Existing perpetual coupon Rs 10, market price Rs 80, tax 25%. Current cost?

A. 10%. B. 12.5% before tax. C. 7.5% on historic 100. D. 9.375%.

Explanation

Correct answer D: 9.375%.

10 x.75/80=.09375.

FM-C04-P004 · 2 marks

Coupon 8, net 100, no deductible interest or usable tax shield in case. Cost?

A. 25%. B. 6% automatically. C. 8%. D. 0%.

Explanation

Correct answer C: 8%.

No shield is assumed, so 8/100.

FM-C04-P005 · 2 marks

NP 90, RV 100, n 5, coupon 10, coupon-only tax 30%. Approx cost using average capital?

A. 8.8421% shielding the whole numerator. B. 10%. C. 7%. D. 9.4737%.

Explanation

Correct answer D: 9.4737%.

(7+2)/95; redemption difference is not deductible here.

FM-C04-P006 · 2 marks

Receive 70 now and repay 100 in 3 years, no tax. Exact annual cost?

A. 0%. B. 12.6248%. C. 11.7647% approximation. D. 14.2857% linear.

Explanation

Correct answer B: 12.6248%.

(100/70)^(1/3)-1.

FM-C04-P007 · 2 marks

Why can bullet-redemption approximation fail on annually repaid principal?

A. It is always exact. B. Principal repayments never matter. C. Cash dates and declining principal differ. D. IRR must equal gross coupon.

Explanation

Correct answer C: Cash dates and declining principal differ.

Discount actual scheduled payments.

FM-C04-P008 · 2 marks

Dividend 9, net 94, no deduction. Perpetual preference cost?

A. 6.7021% after invented tax relief. B. 9%. C. 9.5745%. D. 0%.

Explanation

Correct answer C: 9.5745%.

9/94; no tax shield under case.

FM-C04-P009 · 2 marks

Dividend 8, NP 95, RV 105, n 4, no tax. Average-capital approximation?

A. 10.67% labelled exact approximation. B. 8%. C. 10.5%. D. 8.1% with invented shield.

Explanation

Correct answer C: 10.5%.

(8+10/4)/100=10.5%; exact IRR differs.

FM-C04-P010 · 2 marks

D0=4, g 5%. Next expected dividend?

A. Rs 4.00. B. Rs 5.00. C. Rs 3.80. D. Rs 4.20.

Explanation

Correct answer D: Rs 4.20.

4 x 1.05.

FM-C04-P011 · 2 marks

D1=4.2, issue 80, flotation 4, g 5%. New equity cost?

A. 10% using D0. B. 15%. C. 10.5263%. D. 10.25% using market 80.

Explanation

Correct answer C: 10.5263%.

4.2/76+.05.

FM-C04-P012 · 2 marks

Issue 100, one-time float 5%, D1=5, g 4%. New cost?

A. 5.2632% ignoring growth. B. 9.2632%. C. 14% adding 5 points. D. 9%.

Explanation

Correct answer B: 9.2632%.

5/95+.04.

FM-C04-P013 · 2 marks

Dividend 2 becomes 2.662 over 3 years. Compound growth?

A. 33.1% annual. B. 11.0333% linear. C. 5%. D. 10%.

Explanation

Correct answer D: 10%.

(2.662/2)^(1/3)-1.

FM-C04-P014 · 2 marks

Retention 40%, return on reinvestment 15%. Stable g?

A. 15%. B. 6%. C. 37.5%. D. 55%.

Explanation

Correct answer B: 6%.

b*r=.4 x.15.

FM-C04-P015 · 2 marks

Rf 6%, market return 12%, beta 1.25. Ke?

A. 7.5%. B. 13.5%. C. 6%. D. 21%.

Explanation

Correct answer B: 13.5%.

6+1.25 x(12-6).

FM-C04-P016 · 2 marks

Rf 5%, already-stated market premium 8%, beta 1.1. Ke?

A. 13.8%. B. 18.8%. C. 8.3% subtracting Rf twice. D. 8%.

Explanation

Correct answer A: 13.8%.

5+1.1 x 8.

FM-C04-P017 · 2 marks

Constant EPS 8, price 64. Model earnings-price rate?

A. Guaranteed 12.5% cash dividend. B. 8 times. C. 8%. D. 12.5%.

Explanation

Correct answer D: 12.5%.

8/64; earnings are not automatic cash dividends.

FM-C04-P018 · 2 marks

Buy 100, receive 10 at year 1, and 10 dividend plus 110 sale price at year 2. Historical IRR?

A. 30% annual. B. 10% ignoring sale gain. C. About 14.66%, not guaranteed future required return. D. 0%.

Explanation

Correct answer C: About 14.66%, not guaranteed future required return.

100=10/(1+k)+120/(1+k)^2; historical conditions need review.

FM-C04-P019 · 2 marks

Weights debt 40%, preference 10%, equity 50%; costs 6%, 9%, 12% respectively. WACC?

A. 10.5%. B. 12%. C. 27%. D. 9.3%.

Explanation

Correct answer D: 9.3%.

2.4+.9+6.

FM-C04-P020 · 2 marks

Market debt 30, preference 10, equity 100; costs 6%, 9%, 12%. WACC?

A. 10.5%. B. 9.3% using other weights. C. 8.57% equity contribution alone. D. 27%.

Explanation

Correct answer A: 10.5%.

(1.8+.9+12)/140.

FM-C04-P021 · 2 marks

Market equity 100 already includes retained claims. Add book retained 20 to market total?

A. Retained funds have no cost. B. No, that double counts the equity claim. C. Always add 20. D. Ignore all equity.

Explanation

Correct answer B: No, that double counts the equity claim.

Market equity is one total unless an explicit allocation convention divides it once.

FM-C04-P022 · 2 marks

Retention 18 lakh, target equity 60%. Total-funding breakpoint?

A. Rs 30 lakh. B. Rs 10.8 lakh. C. Rs 18 lakh. D. Rs 45 lakh using debt 40%.

Explanation

Correct answer A: Rs 30 lakh.

18/.6.

FM-C04-P023 · 2 marks

Target debt 40% at 6%, equity 60% retained at 12%. MCC?

A. 9.6%. B. 18%. C. 6%. D. 7.2%.

Explanation

Correct answer A: 9.6%.

.4 x 6+.6 x 12.

FM-C04-P024 · 2 marks

Same target 40/60; debt 6%, external equity 14%. MCC?

A. 14%. B. 9.6%. C. 20%. D. 10.8%.

Explanation

Correct answer D: 10.8%.

.4 x 6+.6 x 14.

FM-C04-P025 · 2 marks

Debt capacity 15 lakh at low rate, target debt 50%. Total-funding breakpoint?

A. Rs 30 lakh. B. Rs 15 lakh. C. Rs 50 lakh. D. Rs 7.5 lakh.

Explanation

Correct answer A: Rs 30 lakh.

15/.5.

FM-C04-P026 · 2 marks

After-tax half-yearly IRR 3.5%. Effective annual rate?

A. 14%. B. 7.1225%. C. 3.5%. D. 7% nominal labelled effective.

Explanation

Correct answer B: 7.1225%.

1.035^2-1.

FM-C04-P027 · 2 marks

Forecast conversion shares value 120 versus cash redemption 100; supplied higher-value convention. Terminal model value before final coupon?

A. Rs 120, conditional and possibly non-cash. B. Always 100 regardless of terms. C. Rs 220 summing both alternatives. D. Guaranteed 120 cash payment.

Explanation

Correct answer A: Rs 120, conditional and possibly non-cash.

Use choice once; forecast/option and economic-value assumptions matter.

FM-C04-P028 · 2 marks

D1 positive but Ke 10%, g 12%. P=D1/(Ke-g) means what?

A. A negative fair price to trade. B. Invalid finite positive constant-growth valuation. C. Free equity. D. Growth has no effect.

Explanation

Correct answer B: Invalid finite positive constant-growth valuation.

The perpetuity requires Ke>g.

FM-C04-P029 · 2 marks

NPVs +2.01 at 8% and-1.78 at 9%. Linear estimate?

A. About 9.53%. B. About 8.47%. C. About 8.53%. D. Exactly 8.00%.

Explanation

Correct answer C: About 8.53%.

8+2.01/(2.01+1.78) percentage points; estimate only.

FM-C04-P030 · 2 marks

Different-risk project uses company WACC without review. What is unsafe?

A. Matching after-tax cash flows. B. Treating that rate as automatically appropriate. C. Matching currency and timing. D. Checking project risk.

Explanation

Correct answer B: Treating that rate as automatically appropriate.

Company average is not a universal project hurdle.