Question

In: Finance

1A. Your company's interest expense for a loan borrowed to finance a project is $2,000,000. Given...

1A. Your company's interest expense for a loan borrowed to finance a project is $2,000,000. Given that the corporate tax rate is 20 %, what is the after-tax cost of this debt?

		$ 2,400,000
		$ 400,000
		$ 1,800,000
		$ 1,600,000

1B. Which of the following changes a firm's Beta?

		Changes in product line.
		Changes in technology.
		Changes in the market.
		All

1C. Which of the following is a non-systematic risk?

		Inflation risk
		Risk of unexpected strike by the employees of a company.
		Interest rate risk
		All

1D. If a security's Beta is equal to zero, then its rate of return is equal to the rate of return on the market portfolio.

True

False

1E. Systematic risk can not be eliminated by diversification.

True

False

Expert Solution

1A. After tax cost of debt = (cost of debt)-(1-Tax)

= 20,00,000(1-.20)

= 16,00,000

Correct answer would be option (d) 16,00,000. This is because the interest cost payable is tax deductible.

1.B.beta is a systematic risk and it is only related to change in the market risk so changes in the market would be leading to changes in beta.

Changes in product line or changes in technology is related to firm a specific factor and they are not systematic risk.

Correct answer option ( C) changes in market

1.(C)risk of unexpected strike by the employee of the company is non systematic risk because it is related to firm specific factor.

Rest of the two options are systematic risk.

Correct answer would be option (b)

1.d.the given statement is TRUE because the expected rate of return would be equal to risk free rate when the beta will be zero because risk premium has to be multiplied with beta and if it is zero then it will be equal to risk free rate.

1.e. the given statement is TRUE because systematic risk can only be reduced it can never be eliminated through diversification.

jeff jeffy answered 1 year ago

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