a) Our investment bankers tell us that our firm could sell 15-year bonds with a 5.25% coupon for $1138.98. Our tax rate is 35%. Our after-tax cost of debt is expected to be

1. 5.25%
2. 13.9%\
3. 4.0%
4. 2.6% \
5. 1.4%

b) Which statement is most correct?

1. Expected Return is a function of price.
2. Required return is a function of risk
3. In equilibrium, expected return equals required return.
4. In equilibrium, price equals value.
5. All of the above statements are correct.

c) Leverage increases a firm's financial risk. This is because

1. Borrowing money makes it likely that the firm will default
2. Strong companies do not need to borrow money.
3. Shareholders will raise their required rates of return if the firm borrows.
4. Interest expenses is a fixed cost, which increases the variability of earnings.
5. Sales are more variable if a firm borrows money.