If a Firm Wants to Borrow $10 Million and the Real

question 47

Multiple Choice

If a firm wants to borrow $10 million and the real interest rate increases from 5 per cent to 6 per cent, then the cost of the investment has increased by

• A) $6 million per year.
• B) $600,000 per year.
• C) $100,000 per year.
• D) $1 million per year.
• E) nothing because the real interest rate is the return the firm will earn on its investment.

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Definitions:

Book Value

The value of an asset according to its balance sheet account balance, calculated by subtracting accumulated depreciation from the asset's original cost.

Boot

Additional cash or property included in a transaction to even out a trade or exchange of dissimilar assets.

Depreciated

Refers to the reduction in the value of an asset over time due to wear and tear or obsolescence.

Nonmonetary Asset

Assets that cannot be easily converted into cash and hold value in forms other than currency, such as property, equipment, and patents.