1. Ernst's Electrical has a bond issue outstanding with ten years to maturity. These bonds have a $1,000 face value, a 5 percent coupon, and pay interest annually. The bonds are currently quoted at 95 percent of face value. What is Ernst's pre-tax cost of debt?

a. 5.33 percent

b. 6.38 percent

c. 5.67 percent

d. 6.47 percent

e. 5.40 percent

2. A new project will cause accounts payable to increase by $70,000, accounts receivable to increase by $80,000 and inventory to decrease by $10,000. Which one of the following statements is true?

a. The project will decrease the amount of cash provided to customers.

b. The change in accounts payable is a use of cash.

c. Net working capital will decrease.

d. The change in inventory is a use of cash.

e. The project will not affect net working capital.