1. Which of the following would tend to reduce the weighted average cost of capital for a firm?
The expected return on the market portfolio decreases but the risk-free rate stays the same
The flotation costs associated with issuing new common stock increase
The company’s beta increases
The firm’s corporate tax rate decreases but does not change the firm’s beta
The firm, with a required return on equity greater than its borrowing rate, retires some debt with money raised through issuing more equity
2. Suppose that Acme Inc. is issuing 10-year bonds that are not callable. The required rate of return that the firm must pay to bondholders is 10%. They are also considering some callable bonds, which are identical to the proposed issue, but will be callable after 5 years at a 5% call premium. How would the callable feature affect the required rate of return?
Because of the call premium, the required rate of return would decline.
There is no reason to expect a change in the required rate of return.
The required rate of return would decline because the bond would then be less risky to a bondholder.
The required rate of return would increase because the bond would then be more risky to a bondholder.
The required rate of return would increase because of the 5% call premium.
3. A 15-year bond with a face value of $1,000 currently sells for $850. Which of the following statements is CORRECT?
The bond’s coupon rate exceeds the discount rate.
The bond’s coupon rate is identical to the discount rate.
The bond’s price is at a premium.
The bond’s price is at a par.
The bond’s coupon rate is less than the discount rate.