1. Hades Furnace has a current, optimal capital structure of 20% debt and 80% equity. Hades can borrow up to $20 million at a 9% rate, an additional $10 million at an 11% rate, and any additional funds at a rate of 13%. The firm expects to retain $60 million of its earnings and can raise additional funds by issuing new common stock. The firm’s common stock currently trades at $30.50. The last dividend paid was $3.20 and dividends are expected to grow at a 4% rate. If Hades issues new common stock, it will be priced at $27.50 per share and the investment banker’s fee will be $0.50 per share. If Hades’ marginal tax rate is 40%, determine its debt breakpoints.
a) $20m and $30m
b) $20m and $50m
c) $100m and $150m
d) There is not enough information to answer the question
2. A $10,000 face value bond is currently quoted at $12,345. The bond pays annual payments of $1,000 and matures in six years. What is the coupon rate?
A. 5.63 percent
B. 2.85 percent
C. 10.00 percent
D. 5.33 percent
E. 12.34 percent