Calculate the cost of debt after tax

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Q1. A firm issued bonds five year ago at a par value of £100 (total funds raised £5m). The bonds carry an annual coupon of 10%, are due to be redeemed in four years, and are currently trading at £98. The corporation tax rate is at 30%. Calculate the cost of debt after tax.

a. 7%

b. 7.45%

c. 10.64%

d. 10%

Q2. Which of the following defines financial risk?

a. The risk that the financial system may collapse because of a loss of confidence

b. The risk to which an investor is exposed when purchasing security

c. The additional variability in returns to shareholders that arises because the financial structure contains debt

d. The additional variability in returns to stock market investors because of systematic risk

Reference no: EM133035499

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