Multiple Choice Questions
1. The term opportunity cost refers to:
(a) The first cost of an alternative that has been accepted for funding
(b) The total cost of an alternative that has been accepted for funding
(c) The rate of return or profit available on the next-best alternative that had to be forgone due to lack of capital funds
(d) The cost of an alternative that was not recognized as an alternative that actually represented a good opportunity
2. The cost of capital is established on the basis of:
(a) The cost of debt financing
(b) The weighted average of debt and equity financing
(c) The cost of equity financing
(d) The cost of debt financing plus the expected inflation rate
3. All of the following are examples of debt capital except:
(a) Retained earnings
(b) Long-term bonds
(c) Loan from a local bank
(d) Purchase of equipment using a credit card
4. All of the following are examples of equity capital except:
(a) Sale of preferred stock
(b) Long-term bonds
(c) Company cash on hand
(d) Use of retained earnings
5. If a public utility expands its capacity to generate electricity by obtaining $41 million from retained earnings and $30 million from municipal bond sales, the utilities’ debt-to-equity mix is closest to:
(a) 58% debt and 42% equity
(b) 73% debt and 27% equity
(c) 27% debt and 73% equity
(d) 42% debt and 58% equity