A Firm Has a Previous Debt Issue on Its Balance

question 33

Multiple Choice

A firm has a previous debt issue on its balance sheet that pays coupons of 8% annually. Newer bonds with equivalent maturity would have 10% annual coupons in order to sell at par value. Based on this information, which statement is true?

• A)The existing bonds would sell for more than par value.
• B)The WACC calculation should use 8% as the cost of debt.
• C)The WACC calculation should use a value higher than 10% as the cost of debt.
• D)The existing bonds would sell at discount.

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Definitions:

Long-Run Average Cost

The per-unit cost of production in the long-term, where all input factors are variable, indicating economies or diseconomies of scale.

Upward-Sloping

Describes a line on a graph that demonstrates an increase in value as it moves to the right, often used to represent increases in costs or prices.

Diseconomies of Scale

Diseconomies of scale occur when a company or business grows so large that the costs per unit increase, leading to decreased efficiency.

Diminishing Marginal Returns

A principle stating that as additional units of a variable input are added to a fixed input, the additional output produced from each new unit will eventually decrease.