Suppose you are buying shares of a discount bond that currently cost $10 each. You have $100 of equity and can borrow at 0% interest. Assume the leverage ratio is defined as debt/equity. If your leverage ratio is 4, what is the lowest price the bond can fall to before you become insolvent? Enter your answer as numbers, not words. Round to the nearest cent if needed and do not put a dollar sign in your answer. Lowest price at leverage ratio of 4 =$ Suppose that your leverage ratio is 9 instead of 4. Given this, what is the lowest price the bond can fall to before you become insolvent? Enter your answer as numbers, not words. Round to the nearest cent if needed and do not put a dollar sign in your answer. Lowest price at leverage ratio of 9 = $ Which leverage ratio is associated with a higher risk of insolvency? Enter the number 4 if you think insolvency risk is higher when leverage is 4; enter the number 9 if you think insolvency risk is higher when leverage is 9. Higher insolvency risk when leverage =
Suppose you are buying shares of a discount bond that currently cost $10 each. You have $100 of equity and can borrow at 0% interest. Assume the leverage ratio is defined as debt/equity. If your leverage ratio is 4, what is the lowest price the bond can fall to before you become insolvent? Enter your answer as numbers, not words. Round to the nearest cent if needed and do not put a dollar sign in your answer. Lowest price at leverage ratio of 4 =$ Suppose that your leverage ratio is 9 instead of 4. Given this, what is the lowest price the bond can fall to before you become insolvent? Enter your answer as numbers, not words. Round to the nearest cent if needed and do not put a dollar sign in your answer. Lowest price at leverage ratio of 9 = $ Which leverage ratio is associated with a higher risk of insolvency? Enter the number 4 if you think insolvency risk is higher when leverage is 4; enter the number 9 if you think insolvency risk is higher when leverage is 9. Higher insolvency risk when leverage =
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Cost of Capital
Shareholders and investors who invest into the capital of the firm desire to have a suitable return on their investment funding. The cost of capital reflects what shareholders expect. It is a discount rate for converting expected cash flow into present cash flow.
Capital Structure
Capital structure is the combination of debt and equity employed by an organization in order to take care of its operations. It is an important concept in corporate finance and is expressed in the form of a debt-equity ratio.
Weighted Average Cost of Capital
The Weighted Average Cost of Capital is a tool used for calculating the cost of capital for a firm wherein proportional weightage is assigned to each category of capital. It can also be defined as the average amount that a firm needs to pay its stakeholders and for its security to finance the assets. The most commonly used sources of capital include common stocks, bonds, long-term debts, etc. The increase in weighted average cost of capital is an indicator of a decrease in the valuation of a firm and an increase in its risk.
Question
Transcribed Image Text:Suppose you are buying shares of a discount bond that currently cost $10 each. You have $100 of
equity and can borrow at 0% interest. Assume the leverage ratio is defined as debt/equity.
If your leverage ratio is 4, what is the lowest price the bond can fall to before you become insolvent?
Enter your answer as numbers, not words. Round to the nearest cent if needed and do not put a
dollar sign in your answer.
Lowest price at leverage ratio of 4 =$
Suppose that your leverage ratio is 9 instead of 4. Given this, what is the lowest price the bond can
fall to before you become insolvent? Enter your answer as numbers, not words. Round to the nearest
cent if needed and do not put a dollar sign in your answer.
Lowest price at leverage ratio of 9 = $
Which leverage ratio is associated with a higher risk of insolvency? Enter the number 4 if you think
insolvency risk is higher when leverage is 4; enter the number 9 if you think insolvency risk is higher
when leverage is 9.
Higher insolvency risk when leverage =
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