1. Lil Joe's Italian Deli, Inc. would like to open another new restaurant. They have observed that their current 10 year bonds which have a 7% coupon rate are selling for 105. If they want to finance the new restaurant with another 20 year bond issue, and wish to sell each bond for its par value of $1,000, the new bonds must have a coupon rate equal to:
a. 6.31%
b. 7.35%
c. A coupon rate above the 7% coupon on the current bonds
d. Cannot be determined from the information provided
e. None of the answers provided is correct
2. Minimizing the cost of capital involves identifying the optimal financial structure of the firm which means finding the lowest cost structure of items such as account payable, notes payable, bonds, debentures, and all other debt financing of the firm.
a. True
b. False
3. Drinkable Water Systems is analyzing a project with projected cash inflows of $137,400, $189,300, and -$25,000 for years 1 to 3, respectively. The project costs $236,000 and has been assigned a discount rate of 14 percent. Should this project be accepted based on the discounting approach to the modified internal rate of return? Why or why not?
A. Yes; The MIRR is 13.48 percent.
B. Yes; The MIRR is 17.85 percent.
C. Yes; The MIRR is 11.23 percent.
D. No; The MIRR is 13.48 percent.
E. No; The MIRR is 17.85 percent.