e inflation rate 43) The additional premium added to the real interest rate by l

Question

e inflation rate 43) The additional premium added to the real interest rate by lenders to com is called? debt instrument which cannot be converted to cash quickly at its existing value is cala the inflation premium default risk premium liquidity premium b. d. maturity premium e. investment risk premium 44) Suppose the real-risk free rate ofinterest is maturityr sk premium 1s2%, inflation premium is 6%, the default risk on similar debt is 3%, and the liquidity premium is 2%. What is the nominalinterest rate on this venture's debt capital? a. b. c. d. 13% 14% 15% 16% 17% 45) A venture has raised $4.000 of debt and $6.000 of eguity to finance its firm. Its cost of borrowing is696, its tax rate is 40 and cost of equity capita average cost of capital? 1 is 8%, what is the venture's weighted -?a. b. 8.0% 7.2% 7.0% 6.2% 6.0% ou) e. The exam is now complete Turn in 1) this packet, 2) your scantron, and 3) your page of notes to the professor

Explanation / Answer

43) When any financial instrument cannot be converted to cash easily, it has some illiquidity in it. Hence the premium provided for this would be liquidity premium.
Hence option c is correct
Inflation premium is provided above real return
Default risk premium is provided for loss due to default
Maturity premium is for long term bonds
invetment risk premium is similar to default premium as it incorporates credit risk

44) Nominal rate = Real rate+Inflation+Default risk+ maturity premium +liquidity premium
= 4+6+3+2+2=17%

Hence e is most correct option

45)Total = 4000+6000=10,000

Debt %=40%

Cost of debt = 6(1-0.4)=3.6%

Equity=60%
Cost of equity = 8%

WACC= (0.4*3.6)+(0.6*8)=6.24%


Hence option d is most apt

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