1. Kevin takes out a 10 year loan of L which he repays with payments of 1000 at the end of each year atan annual effective interest rate of i. The total of the interest paid during the life of the loan is also equal to L. How much interest is paid in the first payment?
2. Solving for Rates What annual rate of return is earned on a $3,300 investment when it grows to $7,100 in nineteen years?
3. According to the trade-off theory, how is the capital structure determined? Firms have an incentive to add leverage to the capital structure. Briefly describe an incentive to add leverage. Then, refer to Equation 16.10 in the material this week and explain how indirect costs of financial distress affect firms in different ways.