Which of the Following Statements About the Loan in the Question

question 19

Multiple Choice

Which of the following statements about the loan in the question above are TRUE?

• A) The market value of the loan is higher than the book value of the loan because the market rate of interest is lower than the interest rate on the loan
• B) The market value of the loan is lower than the book value of the loan because the market rate of interest is lower than the interest rate on the loan
• C) The market value of the loan is higher than the book value of the loan because the market rate of interest is higher than the interest rate on the loan
• D) The market value of the loan is lower than the book value of the loan because the market rate of interest is higher than the interest rate on the loan

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Definitions:

M&M II

Modigliani and Miller Proposition II; a theory on capital structure, which states that the value of a firm is independent of its capital structure, under certain assumptions.

Unlevered Cost

It refers to an investment's cost or return that does not consider the effects of borrowing or leverage.

Targeted Cost

A cost management strategy where a product's planned profit and required cost are computed by considering the competitive market price.

Debt-Equity Ratio

This ratio measures the balance between financing a company's assets with equity compared to debt.