Q1. For a firm financed with common stock and fixed-rate debt, an analyst should most appropriately adjust which of the following items for a change in market interest rates?

A)   Interest expense.

B)   Cash flow from financing.

C)   Debt-to-equity ratio.

Q2. An increase in interest rates is most likely to benefit:

A)   firms that issued debt at a lower cost than current rates.

B)   firms with more equity than debt.

C)   firms with no debt.

答案和详解如下：

Q1. For a firm financed with common stock and fixed-rate debt, an analyst should most appropriately adjust which of the following items for a change in market interest rates?

A)   Interest expense.

B)   Cash flow from financing.

C)   Debt-to-equity ratio.

Correct answer is C)

For the purpose of analysis, the value of debt should be adjusted for a change in interest rates. This will change the debt-to-equity ratio. Because changes in interest rates will change the market value of the debt, but not the coupon, interest expense will be unchanged. (However, if a firm has variable-rate debt, interest expense will change when interest rates change, but the market value of the variable-rate debt will not change significantly.)

Q2. An increase in interest rates is most likely to benefit:

A)   firms that issued debt at a lower cost than current rates.

B)   firms with more equity than debt.

C)   firms with no debt.

Correct answer is A)

Firms that issued the debt at a lower cost than the current rates will benefit from an increase in interest rates. The higher interest rates will decrease the market value of their outstanding debt.

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