If the Marginal Rate of Return Expected from a Purchase

question 8

Multiple Choice

If the marginal rate of return expected from a purchase of equipment is greater than the market interest rate, the firm should

• A)not purchase the equipment
• B)purchase the equipment
• C)either purchase or not purchase the equipment, depending on the marginal resource cost
• D)inform stockholders that the company expects a decrease in earnings from the purchase
• E)seek government assistance in raising market interest rates

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Definitions:

Corporate Bonds

Debt securities issued by corporations to raise capital, with the promise to repay the principal along with interest on specified dates.

Call Provision

Right of the issuer to buy a bond back from the investor before maturity at a specified price.

Interest Rate

The percentage of a sum of money charged for its use, often expressed as an annual percentage.

Mortgage Pass-Through

A type of security that pools mortgage loans and passes the principal and interest payments from borrowers to investors.