Question

Question 41

From the viewpoint of the lessee, the relevant discount rate for evaluating a lease versus buy decision is _________________________.

Select one:

a. the cost of issuing new common stock

b. the after-tax cost of issuing debt

c. the lessor's cost of debt

d. the pretax cost of issuing debt

e. the firm's cost of capital

Question 42

Etling Inc.'s dividend is expected to grow at 7.5% for the next two years and then at 3% forever. If the current dividend is $3 and the required return is 16%, what is the price of the stock?

Select one:

a. $25.77

b. $26.00

c. $29.45

d. $25.10

e. $25.54

Question 43

What is the market value of a bond that will pay a total of 19 annual coupons of $100 each over the remainder of its life? Assume the bond has a $1,000 face value and an 8%/year yield to maturity.

Select one:

a. $1,135.90

b. $1,196.36

c. $642.26

d. $1,192.07

e. $634.86

Question 44

If you are borrowing money, which one of the following rates would you prefer?

Select one:

a. 9% compounded semi-annually

b. 9% compounded daily

c. 9% paid annually

d. 9% compounded monthly

e. 9% compounded quarterly

Question 45

The purchase and sale of securities after the original issuance occurs in the:

Select one:

a. Liquidation market.

b. Auction market.

c. Secondary market.

d. Primary market.

e. Dealer market.

Answer 1

(41) Buy vs Lease decisions usually involve dent financing in case the buy option provides more value to the lessee. Further, the benefits of the interest tax shield also accrue to the lessee. Additionally, in order to establish equivalence in evaluating the alternatives of buy and lease, the same discount factor is used in both cases. Hence, the financing part ensures that the cost of debt is the best discount rate, the interest tax shield part ensures that the cost of debt should be the after-tax version and the equivalence principle ensures that both alternatives should be discounted at the after-tax cost of issuing debt (not existing debt because the same might be already in use to finance some other project).

Therefore, the correct option is (b).

NOTE: Please raise separate queries for solutions to the remaining unrelated questions.