The optimal capital structure occurs when:

A. The weighted average cost of capital is maximized.

B. The debt-equity ratio is equal to 1.

C. The weighted average cost of capital us minimized.

D. The cost of equity is equal to the after-tax cost of debt.

Question 21

Which of the following strategies will give you additional $3 for every dollar increase in stock

price greater than $65, and additional $2 for every dollar decrease in stock price less than $55?

A. Buying three puts with exercise price of $55 and buying two calls with exercise price of

$65.

B. Buying two puts with exercise price of $65 and buying three calls with exercise price of

$55.

C. Buying two puts with exercise price of $55 and selling three calls with exercise price of

$65.

D. Buying two puts with exercise price of $55 and buying three calls with exercise price of

$65.

Question 22

Suppose a stock has a price of $7.39. The prices of a call and put option on the stock are $1.13

and $1.89 respectively. Both options have the same exercise price of $9.57 and mature in one

year. What must be the risk-free rate if no arbitrage opportunities exist?

Question 23

The problem of using the overall firms beta in discounting projects of different risk is:

A. The firm would accept too many low risk projects.

B. The firm would reject too many low risk bad projects.

C. The firm would accept too many high-risk bad projects.

D. The firm would reject too many high-risk projects.

Question 24

A firm plans to issue a perpetual callable bond with face value of $1,000. The current interest

rate is 0.077. Next year, the interest rate will be 0.048 or 0.088 with equal probability. The bond

is callable at $1,125. What is the coupon amount if the bond is priced to sell at par?

Question 25

The call provision of a bond allows:

A. The issuer to buy back the bond before maturity.

B. The issuer to buy back the bond at maturity.

C. The bondholder to sell back the bond before maturity.

D. The bondholder to buy back the bond before maturity.