Question

1.Link Energy has issued bonds that have a coupon interest rate of 10%. The interbank rate has dropped from 0.5% to 0.27%. Which of the following statements is true?

a. The amount of interest (coupon payment) Link Energy has to pay to bondholders will go down.

b. The par value of Link Energy bonds will go down.

c. The price of the bonds is expected to rise.

d. The price of the bonds is expected to drop.

2. What weakness does the NPV method have that is not present in the payback method?

a. The NPV method is easier to understand.

b. Initial cash flows are ignored.

c. It requires estimating the cost of capital.

d. It takes into account the time value of money.

3. A dealer offers you financing to purchase a car priced at $30,000. Under the finance plan, you would pay $5,000 now and the balance would be repaid in equal annual instalments at the end of each year for 4 years. The finance plan has an implied annual interest rate of 6%. The annual repayments (rounded to the nearest dollar) would be

a. $7,215.

b. $4,769.

c. $8,658.

d. $5,723.

4. Why might management prefer equity financing to debt financing?

a. Debt has to be repaid.

b. A company is more successful if they only have equity financing.

c. Equity financing is usually cheaper.

d. Dividend payments are tax deductible.

Answer 1