1 The phenomenon of compounding connotes which of the follow

1. The phenomenon of compounding connotes which of the following?

A Investment of principal for a prolonged period

B Interest earned over a prolonged period

C Earning income on previously earned income

D Rising interest rates over time

2. Which of the following expresses the value of a levered firm (VL) in the Static Tradeoff model of optimal capital structure? [Note: VU denotes the value of the unlevered firm; CFD denotes expected costs of financial distress; and PV denotes present value.]

A VL = PV(Tax Shield) - PV(CFD)

B VL = VU + PV(Tax Shield) / PV(CFD)

C VL = VU + PV(Tax Shield) - PV(CFD)

D VL = VU + PV(Tax Shield)

3. The higher the opportunity cost of capital the higher the NPV.

TRUE OR FALSE

Solution

1)It is option C . The importance of compounding is we will earn interets on the previous earned interest
2)It is option C
3)False and the higher oppurtunity cost the npv will decrease and they are inversely proportional