A Firm Has 1,000,000 Shares of Common Stock Outstanding, Each

question 92

Multiple Choice

A firm has 1,000,000 shares of common stock outstanding, each with a market price of $10.00 per share. It has 15,000 bonds outstanding, each selling for $900 (with a face value of $1,000) . The bonds mature in 15 years, have a coupon rate of 10%, and pay coupons semi-annually. The firm's equity has a beta of 1.5, and the expected market return is 20%. The tax rate is 35% and the WACC is 16%. What is the risk-free rate?

• A) 4.8%
• B) 11.4%
• C) 27.6%
• D) 30.0%

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Definitions:

Credit Obligations

Financial commitments, such as loans or credit card debt, that an individual or entity is legally required to repay.

Inventory Carrying Cost

The total cost of holding inventory, including storage, insurance, taxes, depreciation, and opportunity costs, among others.

Storage Cost

Expenses associated with storing goods or commodities before they are sold or further processed.

Borrowing Cost

Borrowing cost is the total expense, including interest and fees, associated with obtaining funds through borrowing.