Suppose a new company decides to raise a total of $200 million, with 100 million as common equity and $100 million as long-term debt. The debt can be mortgage bonds of debentures, but by an iron-cind provision in its charter, the company can never raise any additional debt beyond the original $100 million. Given these conditions, which of the following statements is CORRECT? O A. The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be If the debt were raised by issuing $50 million of debentures and 550 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing S100 million of debentures In this situation, we cannot tell for sure how, or even whether, the firm's total interest expense on the 100 million of debt would be affected by the mix of debentures versus first C. martsage bonds. The interest rate on each type of bond would increase as the percentage of mortgage bonds used was increased, but the average cost might well be such that the firm's total interest charges would not be affected materially by the mix between the two. D. The higher the percentage of debentures, the greater the risk borne by cach debenture, and thus the higher the required rate of return on the debentures. If the debt were raised by issuing $50 million of debentures and 550 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if E the debt were raised by issuing $100 million of first mortgage bonds. QUESTION 30 Assuming all else is constant, which of the following statements is CORRECT? O A Other things held constant, a 20-year nero coupon bond has more reinvestment risk than a 20-year coupon bond Other things held constant, for any given maturity, a 10 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate From a corporate borrower's point of view, interest paid on bonds is not tax deductible Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gainstemming from a 10 percentage point decrease in the interest rate OE QUESTION 31 A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b-1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with 0.75. However, Stock A's mandard deviation of returns is 12% versus % for Stock B Whish stock should this investor add to his or her portfolio, or does the choice not matter? B, ie, the investor should be indifferent between the two O A Either A OB. Stock A Suppose a new company decides to raise a total of $200 million, with 100 million as common equity and $100 million as long-term debt. The debt can be mortgage bonds of debentures, but by an iron-cind provision in its charter, the company can never raise any additional debt beyond the original $100 million. Given these conditions, which of the following statements is CORRECT? O A. The higher the percentage of debt represented by mortgage bonds, the riskier both types of bonds will be and, consequently, the higher the firm's total dollar interest charges will be If the debt were raised by issuing $50 million of debentures and 550 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if the debt were raised by issuing S100 million of debentures In this situation, we cannot tell for sure how, or even whether, the firm's total interest expense on the 100 million of debt would be affected by the mix of debentures versus first C. martsage bonds. The interest rate on each type of bond would increase as the percentage of mortgage bonds used was increased, but the average cost might well be such that the firm's total interest charges would not be affected materially by the mix between the two. D. The higher the percentage of debentures, the greater the risk borne by cach debenture, and thus the higher the required rate of return on the debentures. If the debt were raised by issuing $50 million of debentures and 550 million of first mortgage bonds, we could be certain that the firm's total interest expense would be lower than if E the debt were raised by issuing $100 million of first mortgage bonds. QUESTION 30 Assuming all else is constant, which of the following statements is CORRECT? O A Other things held constant, a 20-year nero coupon bond has more reinvestment risk than a 20-year coupon bond Other things held constant, for any given maturity, a 10 percentage point decrease in the market interest rate would cause a smaller dollar capital gain than the capital loss stemming from a 1.0 percentage point increase in the interest rate From a corporate borrower's point of view, interest paid on bonds is not tax deductible Other things held constant, price sensitivity as measured by the percentage change in price due to a given change in the required rate of return decreases as a bond's maturity increases For a bond of any maturity, a 1.0 percentage point increase in the market interest rate (rd) causes a larger dollar capital loss than the capital gainstemming from a 10 percentage point decrease in the interest rate OE QUESTION 31 A highly risk-averse investor is considering adding one additional stock to a 3-stock portfolio, to form a 4-stock portfolio. The three stocks currently held all have b-1.0, and they are perfectly positively correlated with the market. Potential new Stocks A and both have expected returns of 15%, are in equilibrium, and are equally correlated with the market, with 0.75. However, Stock A's mandard deviation of returns is 12% versus % for Stock B Whish stock should this investor add to his or her portfolio, or does the choice not matter? B, ie, the investor should be indifferent between the two O A Either A OB. Stock A