Q1- Ernst's Electrical has a bond issue outstanding with ten years to maturity. These bonds have a $1,000 face value, a 5 percent coupon, and pay interest annually. The bonds are currently quoted at 101 percent of face value. What is Ernst's pre-tax cost of debt?

Select one:

a. 5.53 percent

b. 4.87 percent

c. 4.94 percent

d. 4.33 percent

e. 4.47 percent

Q2- Your company purchased a piece of land five years ago for $150,000 and subsequently added $175,000 in improvements. The current book value of the property is $225,000. There are two options for future use of the land: 1) the land can be sold today for $375,000 on a net after-tax basis; 2) your company can destroy the past improvements and build a factory on the land. In consideration of the factory project, what amount (if any) should the land be valued at?

Select one:

a. The original $150,000 purchase price of the land itself.

b. The after-tax sales value of $375,000.

c. The property should be valued at zero since it is a sunk cost.

d. The sales price of $375,000 less the book value of the improvements.

e. The present book value of $225,000.