1.
| Suppose one rating agency recently published new rating on a corporate bond. How would the bond price change if the rating was downgraded? Why? |
2.
| Two bonds, bond A and bond B, have the same maturity, risk ratings and face value but have different coupon rates. | ||||||||||
| Supper bond A has higher coupon rate than bond B. Which bond will be more sensitive to the movement in the interest rate? | ||||||||||
3.
| Briefly explain the three forms of market efficiency. For each type, give one example and explain whether market is efficient in your example. |
4.
| What is the definition for IRR? What is the assumption in calculating IRR? List one disadvantage of IRR. |
5.
| Suppose a firm is considering a business expasion plan, which requires some initial capital investment. This plan could be implemented in county A and county B. | |||||||||||||
| Assume the two couties are idential so the sales, cost, and risk associated with the project are the same, except their tax rules. | |||||||||||||
| In county A, capital expenditures must be depreciated over the life of the project. In country B, the capital expenditures could be expensed immediately. | |||||||||||||
| If you are the financial manager, which county will you choose, A or B? Explain the reason. | |||||||||||||
6.
| We learned that WACC is the weighted average of cost of debt and cost of equity. Weights of debt and equity should be based on market value, not book value. | |||||||||||||
| If you make a mistake and use the book value, will you overestimate or underestimate WACC? Explain. | |||||||||||||
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