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(TCO D) Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?

  • FIN 516 Advanced Managerial Finance Week 6 Quiz Answers

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(TCO D) Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?
(a) The yield to maturity on the company's outstanding bonds increases due to a weakening of the firm's financial situation.
(b) A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates.
(c) The flotation costs associated with issuing new bonds rise.
(d) The firm's CFO believes that interest rates are likely to decline in the future.
(e) The firm's CFO believes that corporate tax rates are likely to be increased in the future.

(TCO D) The State of Idaho issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds 5 years ago. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 5% of the face amount. Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%. What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are not relevant.

(a) $278,616

(b) $292,536

(c) $307,163

(d) $278,606

(e) $338,647

(TCO D) New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.
What will the after-tax annual interest savings for NYW be if the refunding takes place?
(a) $664,050
(b) $699,000
(c) $768,900
(d) $845,790
(e) $930,369

(TCO E) Which of the following statements is most correct?
(a) Firms that use off balance sheet financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements.
(b) Capitalizing a lease means that the firm issues equity capital in proportion to its current capital structure, in an amount sufficient to support the lease payment obligation.
(c) The fixed charges associated with a lease can be as high as, but never greater than, the fixed payments associated with a loan.
(d) Capital, or financial, leases generally provide for maintenance by the lessor.
(e) A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.

(TCO E) In the lease versus buy decision, leasing is often preferable
(a) because it has no effect on the firm's ability to borrow to make other investments.
(b) because generally, no down payment is required, and there are no indirect interest costs.
(c) because lease obligations do not affect the firm's risk as seen by investors.
(d) because the lessee owns the property at the end of the least term.
(e) because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.

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