Question 1

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

Accepted Answer

A) True 
 B)False

Question 2

FAS 13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the

Accepted Answer

A)  residual value as a fixed asset. 
B)  residual value as a liability. 
C)  present value of future lease payments as an asset and also showing this same amount as an offsetting liability. 
D)  undiscounted sum of future lease payments as an asset and as an offsetting liability. 
E)  undiscounted sum of future lease payments, less the residual value, as an asset and as an offsetting liability. 
A)  residual value as a fixed asset. 
B)  residual value as a liability. 
C)  present value of future lease payments as an asset and also showing this same amount as an offsetting liability. 
D)  undiscounted sum of future lease payments as an asset and as an offsetting liability. 
E)  undiscounted sum of future lease payments, less the residual value, as an asset and as an offsetting liability.

Question 3

A sale and leaseback arrangement is a type of financial, or capital, lease.

Accepted Answer

A) True 
 B)False

Question 4

Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm will depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow $4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual maintenance costs associated with ownership are estimated at $240,000 payable at the end of the year, but this cost would be borne by the lessor if the equipment is leased. What is the net advantage to leasing (NAL), in thousands? (Suggestion: Delete 3 zeros from dollars and work in thousands.)

Accepted Answer

A)  $ 96 
B)  $106 
C)  $112 
D)  $117 
E)  $123 
A)  $ 96 
B)  $106 
C)  $112 
D)  $117 
E)  $123

Question 5

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Accepted Answer

A)  $3.76 
B)  $3.94 
C)  $4.14 
D)  $4.35 
E)  $4.56 
A)  $3.76 
B)  $3.94 
C)  $4.14 
D)  $4.35 
E)  $4.56

Question 6

Leasing is often referred to as off-balance-sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Accepted Answer

A) True 
 B)False

Question 7

Herring Inc. is considering issuing 15-year, 8% semiannual coupon, $1,000 face value convertible bonds at a price of $1,000 each. Each bond would be convertible into 25 shares of common stock. If the bonds were not convertible, investors would require an annual nominal yield of 10%. What is the straight-debt value of each bond at the time of issue?

Accepted Answer

A)  $725.58 
B)  $763.76 
C)  $803.96 
D)  $846.28 
E)  $888.59 
A)  $725.58 
B)  $763.76 
C)  $803.96 
D)  $846.28 
E)  $888.59

Question 8

Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

Accepted Answer

A) True 
 B)False

Question 9

Orient Airlines' common stock currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2022. What is the conversion value of the bond?

Accepted Answer

A)  $707.33 
B)  $744.56 
C)  $783.75 
D)  $825.00 
E)  $866.25 
A)  $707.33 
B)  $744.56 
C)  $783.75 
D)  $825.00 
E)  $866.25

Question 10

Which of the following statements concerning warrants is most CORRECT?

Accepted Answer

A)  Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants are used but remains the same if convertibles are used. 
B)  Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops. 
C)  Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen. 
D)  A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders. 
E)  A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital. 
A)  Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock's price increases. However, if the option is exercised, the issuing company's debt declines if warrants are used but remains the same if convertibles are used. 
B)  Warrants are long-term put options that have value because holders can sell the firm's common stock at the exercise price regardless of how low the market price drops. 
C)  Warrants are long-term call options that have value because holders can buy the firm's common stock at the exercise price regardless of how high the stock's price has risen. 
D)  A firm's investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders. 
E)  A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.

Question 11

Ellis Enterprises is considering whether to lease or buy some necessary equipment it needs for a project that will last the next 3 years. If the firm buys the equipment, it will borrow $4,800,000 at 8% interest. The firm's tax rate is 35% and the firm's before-tax cost of debt is 8%. Annual maintenance costs associated with ownership are estimated to be $300,000 and the equipment will be depreciated on a straight-line basis over 3 years. What is the annual end-of-year lease payment (in thousands of dollars) for a 3-year lease that would make the firm indifferent between buying or leasing the equipment? (Suggestion: Delete 3 zeros from dollars and work in thousands.)

Accepted Answer

A)  $1,950 
B)  $2,052 
C)  $2,160 
D)  $2,268 
E)  $2,382 
A)  $1,950 
B)  $2,052 
C)  $2,160 
D)  $2,268 
E)  $2,382

Question 12

Quaid Co.'s common stock sells for $28.00, pays a dividend of $2.10, and has an expected long-term growth rate of 6%. The firm's straight-debt bonds yield a 10.8% return. Quaid is planning a convertible bond issue. The bonds will have a 20-year maturity, pay a 10% annual coupon, have a par value of $1,000, and a conversion ratio of 25 shares per bond. The bonds will sell for $1,000 and will be callable after 10 years. Assuming that the bonds will be converted at Year 10, when they become callable, what will be the expected return on the convertible when it is issued?

Accepted Answer

A)  10.36% 
B)  10.91% 
C)  11.48% 
D)  12.06% 
E)  12.66% 
A)  10.36% 
B)  10.91% 
C)  11.48% 
D)  12.06% 
E)  12.66%

Question 13

Leasing is typically a financing decision and not a capital budgeting decision. The decision to acquire the asset is a "done deal" before the lease analysis begins. Therefore, in a lease analysis, we are concerned simply with whether to finance the asset with a lease or with a loan.

Accepted Answer

A) True 
 B)False

Question 14

Herbert Engineering is issuing new 15-year bonds that have warrants attached. If not for the attached warrants, the bonds would carry a 9% annual interest rate. However, with the warrants attached the bonds will pay a 6% annual coupon. There are 30 warrants attached to each bond, which has a par value of $1,000. What is the value of the straight-debt portion of the bonds?

Accepted Answer

A)  $720.27 
B)  $758.18 
C)  $796.09 
D)  $835.89 
E)  $877.69 
A)  $720.27 
B)  $758.18 
C)  $796.09 
D)  $835.89 
E)  $877.69

Question 15

Which of the following is most CORRECT?

Accepted Answer

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. 
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.

Question 16

The following data apply to Saunders Corporation's convertible bonds. What is the bond's conversion ratio?

Accepted Answer

A)  27.14 
B)  28.57 
C)  30.00 
D)  31.50 
E)  33.08 
A)  27.14 
B)  28.57 
C)  30.00 
D)  31.50 
E)  33.08

Question 17

Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.

Accepted Answer

A) True 
 B)False

Question 18

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

Accepted Answer

A)  equity cash flows. 
B)  capital budgeting project cash flows. 
C)  debt cash flows. 
D)  pension fund cash flows. 
E)  sales. 
A)  equity cash flows. 
B)  capital budgeting project cash flows. 
C)  debt cash flows. 
D)  pension fund cash flows. 
E)  sales.

Question 19

If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.

Accepted Answer

A) True 
 B)False

Question 20

Preferred stock normally has no voting rights. However, most preferred issues stipulate that the preferred stockholders can elect a minority number of the directors if the preferred dividend is omitted.

Accepted Answer

A) True 
 B)False

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

FAS 13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the

A sale and leaseback arrangement is a type of financial, or capital, lease.

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Leasing is often referred to as off-balance-sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

Orient Airlines' common stock currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2022. What is the conversion value of the bond?

Which of the following statements concerning warrants is most CORRECT?

Leasing is typically a financing decision and not a capital budgeting decision. The decision to acquire the asset is a "done deal" before the lease analysis begins. Therefore, in a lease analysis, we are concerned simply with whether to finance the asset with a lease or with a loan.

Which of the following is most CORRECT?

The following data apply to Saunders Corporation's convertible bonds. What is the bond's conversion ratio?

Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.

Preferred stock normally has no voting rights. However, most preferred issues stipulate that the preferred stockholders can elect a minority number of the directors if the preferred dividend is omitted.

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Mergers

Filters

Exam 20: Hybrid Financing

The "preferred" feature of preferred stock means that it normally will provide a higher expected return than will common stock.

FAS 13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the

A sale and leaseback arrangement is a type of financial, or capital, lease.

Upstate Water Company just sold a bond with 50 warrants attached. The bonds have a 20-year maturity and an annual coupon of 12%, and they were issued at their $1,000 par value. The current yield on similar straight bonds is 15%. What is the implied value of each warrant?

Leasing is often referred to as off-balance-sheet financing because lease payments are shown as operating expenses on a firm's income statement and, under certain conditions, leased assets and associated liabilities do not appear on the firm's balance sheet.

Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.

Orient Airlines' common stock currently sells for $33, and its 8% convertible debentures (issued at par, or $1,000) sell for $850. Each debenture can be converted into 25 shares of common stock at any time before 2022. What is the conversion value of the bond?

Which of the following statements concerning warrants is most CORRECT?

Leasing is typically a financing decision and not a capital budgeting decision. The decision to acquire the asset is a "done deal" before the lease analysis begins. Therefore, in a lease analysis, we are concerned simply with whether to finance the asset with a lease or with a loan.

Which of the following is most CORRECT?

The following data apply to Saunders Corporation's convertible bonds. What is the bond's conversion ratio?

Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's

If a leased asset has a negative residual value, for example, as a result of a statutory requirement to dispose of an asset in an environmentally sound manner, the lessee of the asset could reasonably expect to pay a lower lease rate because the asset does not have a positive residual value.

Preferred stock normally has no voting rights. However, most preferred issues stipulate that the preferred stockholders can elect a minority number of the directors if the preferred dividend is omitted.

Overview

Financial Markets

Financial Statements

Statement Analysis

Time Value of Money

Forecasting

Interest Rates

Risk and Return

Bonds

Stocks

Cost of Capital

Capital Budgeting Mc Problems

Cash Flow and Risk

Real Options

Capital Structure

Dividends

Working Capital

Derivatives

Multinational

Mergers

Filters