1. Jefferson International’s debt is less expensive than its equity. If it could issue more debt without changing the cost of debt or equity, which of the following would occur? Jefferson’s WACC would decrease. The NPVs of Jefferson’s projects would be higher. Jefferson would pay more in interest expense. Jefferson’s stock price would increase. All of the answers are correct.
2. The real risk-free rate of interest, r*, is 4%, and it is expected to remain constant over time. Inflation is expected to be 2% per year for the next three years, after which time inflation is expected to remain at a constant rate of 5% per year. The maturity risk premium is equal to 0.1(t – 1)%, where t is the bond’s maturity. The liquidity and default risk premia on 10-year corporate bonds are 2.0% and 2.5%, respectively. What is the yield to maturity on a 10-year corporate bond?
8.1% 8.9% 9.0% 12.1% 13.5%