1 Suppose one rating agency recently published new rating on a corporate bond. How would the bond price change if the rating was downgraded? Why? 2 Two bonds, bond A and bond B, have the same maturity, risk ratings and face value but have different coupon rates. Supper bond A has higher coupon rate than bond B. Which bond will be more sensitive to the movement in the interest rate? 3 Briefly explain the three forms of market efficiency. For each type, give one example and explain whether market is efficient in your example. 4 What is the definition for IRR? What is the assumption in calculating IRR? List one disadvantage of IRR. 5 Suppose a firm is considering a business expasion plan, which requires some initial capital investment. This plan could be implemented in county A and county B. Assume the two couties are idential so the sales, cost, and risk associated with the project are the same, except their tax rules. In county A, capital expenditures must be depreciated over the life of the project. In country B, the capital expenditures could be expensed immediately. If you are the financial manager, which county will you choose, A or B? Explain the reason. 6 We learned that WACC is the weighted average of cost of debt and cost of equity. Weights of debt and equity should be based on market value, not book value. If you make a mistake and use the book value, will you overestimate or underestimate WACC? Explain