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

question 26

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 percent, and pay coupons semiannually. The firm's equity has a beta of 1.5, and the expected market return is 20 percent. The tax rate is 35 percent and the WACC is 16 percent. What is the risk-free rate?

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

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Definitions:

Problem-Solving Strategy

An approach or technique used to address a challenge or overcome an obstacle in a systematic manner, often involving specific steps or methods.

Inducing Structure

A problem-solving approach that involves identifying relationships among elements within a problem to deduce the structure of the solution.

Transformation

A thorough or dramatic change in form or appearance, or in the case of biology, the genetic alteration of a cell by the introduction of extraneous DNA.

Functional Fixedness

A mental bias which restricts an individual to utilizing an item solely in its conventional manner, obstructing the capability to perceive other uses or solutions.