19. DR Choi issues a bond that pays 12% coupon rate. Suppose the price of the bo

Question

19. DR Choi issues a bond that pays 12% coupon rate. Suppose the price of the bond market value is 1020 and 8 years left until maturity. Given 32% of tax bracket what is the after tax cost of debt for the company ? A. 7.75% B.8.65% C. 9.88% D.11.43%

20. Which of the following is not correct statement

A. when npv is positive the IRR is greater than cost of capital

B. NPV is IRR method come up with the same conclusion for the most of times

c. when IRR is less than the cost of capital the project is accepted

d. positive npv implies the cash inflow of the project is greater than the cash outflow of the project

21. The longer the time to maturity is the _______the interest rate risk is

a. the less

b. the identical

c. the greater

d. not enogh information

Explanation / Answer

19.

Coupon rate=12%

After tax cost of debt=Pre tax cost of debt *(100-tax rate)

After tax cost of debt=12%(100-32%)

After tax cost of debt=8.16%     

20. c

A project should be accepted only when the IRR is equal or greater than the cost of capital.

21. c

Longer maturities entail higher risk because most bonds lock in an interest rate at issue. If interest rates rise before the bond matures, you are stuck holding a bond that is paying less than other newer bonds are paying. So you either must settle for lower interest, or sell the bond at a loss. In addition to interest rate risk, bonds with longer maturities also carry credit risk

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