Ranger Inc

question 6

Multiple Choice

Ranger Inc.would like to issue new 20-year bonds.Initially, the plan was to make the bonds non-callable.If the bonds were made callable after 5 years at a 5% call premium, how would this affect their required rate of return?

• A) There is no reason to expect a change in the required rate of return.
• B) The required rate of return would decline because the bond would then be less risky to a bondholder.
• C) The required rate of return would increase because the bond would then be more risky to a bondholder.
• D) It is impossible to say without more information.
• E) Because of the call premium, the required rate of return would decline.

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Definitions:

Profit-maximizing

The business objective of achieving the highest possible profit from operations, achieved by balancing costs and revenues.

Factor Price

The payment received by a factor of production, for example, wages for labor, rent for land, or interest for capital.

Production Function

A mathematical representation of the relationship between inputs (such as labor and capital) and the maximum output that can be produced with those inputs.

Profit-maximizing

The process or strategy implemented by firms to determine the price and output level that returns the highest profit.