Mountain Retreat and Resort is undergoing a major expansion. The expansion will be financed by
issuing new 15-year, 1,000 par, 9 annual coupon bonds. The market price of the bonds is 1,070
each.
The firm's flotation expense on the new bonds will be 50 per bond. The firm's marginal tax
rate is 35. What is the relevant cost of the new bonds for capital budgeting purposes?
A) 5.14 B) 8.45 C) 5.69 D) 4.82
Question 2
Assume that a firm has a steady record of paying stable dividends for years. Market analysts had
expected management to increase the dividend by 7.5 in the latest quarter.
However,
management announced a 15 increase in the current year's dividend. The market value of the
stock rose 20 on the day of the announcement. Which of the following would best explain the
stock market's reaction to the announcement?
A) residual dividend theory B) expectations theory
C) dividend irrelevance theory D) agency theory
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