1.A firm issued bonds five year ago at a par value of 100 (total funds raised 5m). The bonds carry an annual coupon of 10%, are due to be redeemed in four years, and are currently trading at 98. The corporation tax rate is at 30%. Calculate the cost of debt after tax.

a. 7%

b. 7.45%

c. 10.64%

d. 10%

2.Which of the following defines financial risk?

a. The risk that the financial system may collapse because of a loss of confidence

b. The risk to which an investor is exposed when purchasing security

c. The additional variability in returns to shareholders that arises because the financial structure contains debt

d. The additional variability in returns to stock market investors because of systematic risk