7 A reason why a firm should take on debt is to (circle all that apply) : (A) Bo

Question

7 A reason why a firm should take on debt is to (circle all that apply) :

(A)        Borrowing money always makes sense

(B) The interest rate on debt is lower than the expected return on projects you are financing

(C) It is always good to finance by a mixture of debt and equity

(D) None of the above

8 What exists between industries in a value chain (circle all that apply) ?

(A)          Bond markets

(B)    Markets for initial public offerings

(C)   Equity markets

(D)   Markets setting the price of a product supplied to the next

Industry in the chain

9 If you are run a manufacturing plant that buys rare earth metals to make semiconductors. Are you long or short rare earth metals ?

(A)    Long (B)    Short (C)   Both (D)   Neither

10 If you are long something, in order to hedge what should you do ?

(A)        Go long something else

(B) Go short something else

11 Your company is considering purchasing another company for $10 million. The present value of the cash flow from the company is projected by your staff to be $9 million. You believe you can even further improve the profitability of the company buy reducing the annual costs of the company by $1 million per year for the next 10 years. You have alternative investments available to you that earn 10% returns. What is the NPV of

this purchase?

Explanation / Answer

7) The correct option is option - B

Debt financing is cost is lower when compared to own funds and it will also decrease the cost of capital of the firm.

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