If a Firm Has a Credit Risk Premium of 3

question 1

Multiple Choice

If a firm has a credit risk premium of 3 percent and the Treasury security rate is 4 percent, the firm will be able to borrow at ________. If the Fed implements a monetary policy that raises the Treasury security rate to 6 percent, the cost of borrowing for the firm will be ________.

• A)7 percent; 10 percent
• B)4 percent;  6 percent
• C)7 percent; 9 percent
• D)1 percent; 3 percent

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Definitions:

After-Tax Discount Rate

A discount rate that takes into account the effect of taxes when evaluating the net present value of investments or projects.

Straight-Line Depreciation

A method of calculating the depreciation of an asset, which evenly spreads the cost over its useful life.

Initial Investments

The initial amount of money spent to start a project, purchase an asset, or establish a business venture, often before earning any returns.

Working Capital

The difference between a company's current assets and current liabilities, indicating the liquid funds available for operations.