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problem1: The pre-tax cost of debt for a new issue of debt is determined by

[A] the investor's required rate of return on issued stock.

[B] the yield to maturity of outstanding bonds.

[C] the coupon rate of existing debt.

[D] all of the above.

problem2: Although debt financing is usually the cheapest component of capital, it cannot be used to excess because

[A] interest rates may change.

[B] the firm's stock price will increase and raise the cost of equity financing.

[C] the financial risk of the firm may increase and thus drive up the cost of all sources of financing.

[D] underwriting costs may change.

problem3: Applying higher discount rates,

[A] depreciation policy makes no difference.

[B] later year depreciation has a higher net present value.

[C] accelerated cost recovery depreciation is more valuable than straight line.

[D] straight-line depreciation is more valuable than the accelerated cost recovery system of depreciation.

problem4: In applying the internal rate of return method, it is supposed that cash flows can be reinvested at

[A] the internal rate of return

[B] the prevailing interest rate

[C] the cost of equity

[D] the cost of capital 

Basic Finance, Finance

  • Category:- Basic Finance
  • Reference No.:- M920031

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