The average borrowing
rate for interest bearing debt is calculated as:
A) Interest Expense divided by Average
Liabilities
B) Interest Paid divided by Average Liabilities
C) Interest Expense divided by Average
Interest-bearing debt
D) Interest Expense divided by Average Long-term
Debt
Answer: C
Rationale: The average borrowing rate takes into
account all interest-bearing debt
17. When calculating
the cost of debt capital you must multiply the average borrowing rate by:
A) Marginal income tax rate
B) 1 – Marginal income tax rate
C) The effective tax rate
D) 1 – Statutory corporate rate
Answer: B
Rationale: Interest expense is tax deductible so the
cost of debt is multiplied by 1 – Marginal income tax rate
18. The weighted
average cost of capital is used when valuing the payoffs
A) To equity holders
B) To debt holders
C) To both equity and debt holders
D) To equity holders less the payoff to debt
holders
Answer: C
Rationale: WACC is used when the payoffs accrue to the
entire firm