37) PepsiCo uses 30-year Treasury bonds to measure the risk-free rate because: A

Question

37) PepsiCo uses 30-year Treasury bonds to measure the risk-free rate because:

A. these bonds are essentially free of business risk.
B. they capture the long-term inflation expectations of investors associated with investments in long-term assets.
C. these bonds are essentially free of interest rate risk.
D. none of the above.



38) The marginal cost of preferred stock is equal to:

A. the preferred stock dividend divided by the net market price.
B. the preferred stock dividend divided by its par value.
C. the preferred stock dividend divided by market price.
D. (1 - tax rate) times the preferred stock dividend divided by net price.



39) The most expensive source of capital is:

A. retained earnings.
B. new common stock.
C. preferred stock.
D. debt.



40) J & B, Inc. has $5 million of debt outstanding with a coupon rate of 12%. Currently, the yield to maturity on these bonds is 14%. If the firm’s tax rate is 40%, what is the cost of debt to J & B?

A. 5.6%
B. 12.0%
C. 14.0%
D. 8.4%



41) Given the following information, determine the risk-free rate.



Cost of equity = 12%
Beta = 1.50
Market risk premium = 3%



A. 6.5%
B. 8.0%
C. 7.5%
D. 7.0%



42) Bender and Co. is issuing a $1,000 par value bond that pays 9% interest annually. Investors are expected to pay $918 for the 10-year bond. Bender will have to pay $33 per bond in flotation costs. What is the cost of debt if the firm is in the 34% tax bracket?

A. 11.95%
B. 7.23%
C. 9.01%
D. 9.23%

Explanation / Answer

37. A 38. C 39. B 40.D 41. C 42. B

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