1. A firm has a significant amount of debt outstanding and its operations hit a rough patch. The face value of the firm’s debt now exceeds the market value of its operating assets and it has no cash available to fund positive NPV projects. In such a scenario, the firm’s management may be forced to pass up issuing new common shares to fund the positive NPV projects because:
A. the required rate of return on equity suggested by the Capital Asset Pricing is too high.
B. the required rate of return on debt suggested by the Capital Asset Pricing Model is too high.
C. the benefits of the project are shared with debtholders.
D. the debt-equity ratio is already too high.
2. If the actual market interest rate is 15% and real interest rate is 9.2% then the inflation rate is 5.8%.
True
False