q1)

The primary purpose of protective covenants is to help

-reduce interest rate risk.

-the issuer in case of default.

-protect bondholders from issuer actions.

-bondholders whose bonds are called.

-convert bearer bonds into registered form.

q2)

Managers are going to borrow to finance 50% of the value of new assets. The rest will be financed with equity. They have decided that the correct discount rate to value the project is the average of the firm's estimated 10% cost of equity and the after tax cost of debt. The pre-tax cost of the firm's debt is the yield to maturity of bonds the firm is going to issue. The terms of the bonds are:

settlement 5/5/2014

maturity 5/5/2024

rate 10%

pr 110

redemption 100

frequency 2

basis 0

These terms are from the EXCEL function "Yield".

The firm's marginal tax rate is 25%.

The discount rate the firm uses should be:

8.18%

7.6%

12.1%

7.25%