A Firm Has a Capital Structure of 40% Debt and 60

question 68

Multiple Choice

A firm has a capital structure of 40% debt and 60% equity.The firm has bonds outstanding with a face value of $20 million.The bonds pay,on average,a 8% annual coupon and have an average maturity length of 7 years.The market value of the bonds is 110% of face value and the tax rate facing the firm is 40%.The firm has common stock with a beta of 1.25.The risk free rate on Treasury bonds is 2%,while the market risk premium is 8%.A project requires an investment of $10,000 today and will pay $2,500 annually for six years.What is the NPV of the project?

• A) $825
• B) $1,320
• C) $1,460
• D) $1,540

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Definitions:

Elastic

A characteristic of a good or service with demand or supply that is responsive to changes in price, typically resulting in significant quantity changes when prices vary.

Inelastic

Describes a situation in which the demand for a good or service is relatively unresponsive to changes in price.

Total-revenue Curve

A graphical representation that shows how a company's total revenue changes in response to changes in the quantity of goods or services sold.

Linear Demand Curve

A representation of the relationship between the price of a good and the quantity demanded, characterized by a constant slope, indicating a steady change in demand relative to price.