1. Ernst's Electrical has a bond issue outstanding with ten years to maturity. These bonds have a $1,000 face value, a 5 percent coupon, and pay interest annually. The bonds are currently quoted at 95 percent of face value. What is Ernst's pre-tax cost of debt?
a. 5.33 percent
b. 6.38 percent
c. 5.67 percent
d. 6.47 percent
e. 5.40 percent
2. A new project will cause accounts payable to increase by $70,000, accounts receivable to increase by $80,000 and inventory to decrease by $10,000. Which one of the following statements is true?
a. The project will decrease the amount of cash provided to customers.
b. The change in accounts payable is a use of cash.
c. Net working capital will decrease.
d. The change in inventory is a use of cash.
e. The project will not affect net working capital.