HyPo Ltd Has Estimated Its Cost of Debt in 2005

question 33

Multiple Choice

HyPo Ltd has estimated its cost of debt in 2005 using net interest/average net debt to be 8.45 per cent.The 10- year bond yield was 6.50 per cent in 2005 and 6.95 in 2006.Using a risk premium approach,what would be the estimation of the firm's current cost of debt?

• A)7.95 per cent
• B)8.76 per cent
• C)8.90 per cent
• D)8.45 per cent

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Definitions:

ROI Analysis

A financial metric used to evaluate the efficiency of an investment or compare the efficiency of several different investments, calculated by dividing the net profit from the investment by the initial cost of the investment.

Net Operating Income

The income generated from normal business operations, calculated as revenues minus operating expenses and excluding income from investments and taxes.

Average Operating Assets

The average value of assets used by a company in its operational activities, calculated over a certain period of time for analysis of performance efficiency.

Residual Income

The income that remains after subtracting all required costs of capital from the operating income; a measure of net profitability.