James,IncHas Zero-Coupon Outstanding Debt Maturing in 8 Years

question 10

Multiple Choice

James,Inc.has zero-coupon outstanding debt maturing in 8 years.In rank of seniority,each pays at maturity $20 million,$15 million,and $40 million.Assume asset value = $60 million,r = 0.05,σ = 0.28,and no dividend is paid.What is the yield on the $15 million subordinate debt?

• A) 5.72%
• B) 6.72%
• C) 7.72%
• D) 8.72%

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Definitions:

Period Cost

Costs that are expensed in the period in which they are incurred, not directly tied to the production process.

Manufacturing Overhead

All manufacturing costs that are not direct materials or direct labor, including indirect materials, indirect labor, and other production-related expenses.

Prime Cost

The combined cost of direct materials and direct labor that are directly involved in the manufacturing of a product.

Direct Labour

The expenses related to workers who are directly engaged in creating products or services.