Question1: Prices of existing bonds move ______ as market interest rates move ______.
[A] down, down
[B] up, up
[C] up, down
[D] Bond prices don’t move as market interest rates move.
Question2: The weighted average cost of capital is used as a discount rate because
[A] it is comparable to the prevailing market interest rates.
[B] returns below the cost of capital will cover all fixed costs associated with capital and provide an excess return to stockholders.
[C] it is an indication of how much the firm is earning overall.
[D] as long as the cost of capital is earned, the common stock value of the firm will be maintained.
Question3: If a firm’s bonds are currently yielding 8% in the marketplace, why would the firm’s cost of debt be lower?
[A] Interest rates have changed.
[B] Interest is tax-deductible.
[C] Additional debt can be issued more cheaply than the original debt.
[D] There should be no difference; cost of debt is the same as the bond’s market yield.
Question4: Valuation of financial assets requires knowledge of
[A] future cash flows.
[B] appropriate discount rate.
[C] past asset performance.
[E] A and B
Question5: Although debt financing is usually the cheapest component of capital, it cannot be used to excess because
[A] the financial risk of the firm may increase and thus drive up the cost of all sources of financing.
[B] underwriting costs may change.
[C] interest rates may change.
[D] the firm’s stock price will increase and raise the cost of equity financing.