Deck 14: Planning Debt Financing

Question 1

When the present value of a note's promised cash flows is equal to the note's face value:

A)the note is issued at a discount
B)the note is issued at a premium
C)the market rate of interest is less than the face rate of interest
D)the face rate of interest and the market rate of interest are the same

Answer 1

the face rate of interest and the market rate of interest are the same

Question 2

When the cash proceeds of a note is less than the face value of a note the difference is called the:

A)discount on the note
B)market value of the note
C)effective rate of the note
D)carrying value of the note

Answer 2

discount on the note

Question 3

The cash proceed from a note is dependant on which of the following?

A)Market interest rate
B)Face interest rate
C)Face value of the note
D)All of the above

Answer 3

All of the above

Question 4

When the proceeds of a note are less than the face value of the note,which of the following is true.

A)The market rate was less than the face rate of interest.
B)The note was issued at a premium.
C)The market rate of interest was greater than the face rate of interest.
D)The market rate of interest was the same as the face rate of interest.

Question 5

A $1,000 bond with a quoted price of 97 3/4 is selling for:

A)$ 97.75
B)$970.75
C)$977.50
D)$97,750.00

Question 6

A long-term debt instrument issued by a corporation to raise money from the public is called:

A)preferred stock
B)common stock
C)a mortgage
D)a bond

Question 7

Glenda Corp obtained a loan that only required the company to make only payment at the end of 5 years.This is an example of:

A)A noninterest bearing note
B)A periodic payment note
C)An interest bearing note
D)Installment note

Question 8

A $1,000 bond with a quoted price of 103 3/4 is selling for:

A)$103.75
B)$1033.40
C)$1030.75
D)$1300.75

Question 9

George Ryan obtained a car loan that requires him to make payments of $235 per month for 36 months.This is an example of a:

A)lump-sum note
B)periodic payment note
C)noninterest-bearing note
D)periodic and lump-sum note

Question 10

When the market rate of interest is greater than the face rate of interest which of the following is created.

A)A premium
B)A discount
C)A face value
D)None of the above

Question 11

When a note is issued at a premium which of the following is true?

A)The market rate is less than the face rate.
B)The market rate is greater than the face rate.
C)The proceeds of the note are less than the face value of the note.
D)The proceeds will equal the face value.

Question 12

A noninterest-bearing note is always issued

A)At its face value
B)At a premium
C)At a discount
D)Whether it is issued at a premium or discount depends on the market interest rate.

Question 13

When the market rate of interest is less than a note's face rate of interest:

A)the note is issued at a discount
B)the note is issued at a premium
C)the proceeds of the note are less than the face value of the note
D)unable to determine from the information given

Question 14

Documented restrictions that lenders place in the debt agreements for firms using their funds are called:

A)covenants
B)debentures
C)subordinates
D)preemptive rights

Question 15

When leased property is recognized as an asset and a related liability is recorded,the lease is a(n):

A)legal lease
B)capital lease
C)certified lease
D)operating lease

Question 16

When a note is issued at a discount,the carrying value of a note is equal to the:

A)face value of the note less the discount
B)face value of the note plus the discount
C)market value of the note less the discount
D)market value of the note plus the discount

Question 17

When the market rate of interest is less than the note's face rate of interest which of the following is not true?

A)The cash proceeds of the note will be less than the face value
B)The cash interest paid will be less than the interest expense
C)The note will be issued at a premium
D)The cash paid at the maturity of the note will be the same as the face value.

Question 18

The amount of cash raised from the issuance of debt is referred to as the:

A)redemption value
B)effective value
C)maturity value
D)cash proceeds

Question 19

When the market rate of interest is greater than a note's face rate of interest:

A)the note is issued at a discount
B)the note is issued at its face value
C)the proceeds of the note are greater than the face value of the note
D)unable to determine from the information given

Question 20

When a note is issued at a discount which of the following is not true?

A)Borrower gets less cash than the face value
B)Interest expense is greater than cash paid for interest during a period
C)Cash repaid at maturity is less than face value of the note
D)Market rate of interest is greater than face rate of interest on note

Question 21

Convertible bonds may dilute existing stockholders' interest in the corporation.This means

A)convertible bonds reduce common stockholders' earnings because they must pay a higher interest rate than nonconvertible bonds
B)the amount of cash paid out when the convertible bonds are converted will reduce common stockholders' dividends
C)the shares issued for convertible bonds have a preference over other common shares
D)conversion of the bonds would increase the number of common shares outstanding

Question 22

The interest expense on a note during a period is equal to the

A)maturity value multiplied times the face interest rate.
B)maturity value multiplied times the effective interest rate.
C)carrying value at the beginning of the period multiplied times the face interest rate
D)carrying value at the beginning of the period multiplied times the effective interest rate

Question 23

Carter & Cash has just acquired equipment by issuing a $500,000,2 year,non-interest-bearing note.The equipment was recorded on the books at $500,000.What is the result of this?

A)The financial statements are correct
B)Net income is overstated and assets are understated
C)Net income is overstated and liabilities are overstated
D)Assets,liabilities,and stockholders' equity are all understated

Question 24

Which of the following statements about convertible bonds is/are true?

A)conversion of bonds into stock is at the issuing firm's option
B)convertible bonds usually have a higher interest rate than nonconvertible bonds
C)the bonds will be converted only if the value of the stock is greater than the value of the bonds
D)all of the above are true

Question 25

How should interest expense on a non-interest-bearing note be determined?

A)There is no interest expense on a non-interest-bearing note
B)By dividing the discount on the note by the number of years till maturity
C)By multiplying the face amount of the note times the market rate of interest
D)By multiplying the carrying value of the note times the market rate of interest

Question 26

A long-term note secured by land or buildings that serve as collateral,is referred to as a:

A)mortgage
B)debenture
C)property dividend
D)subordinated note

Question 27

On January 1,2010,Complot Corporation issued debentures with a face interest rate of 6 percent and a market interest rate of 7 percent.How will interest expense in 2010 compare with cash interest paid and due in 2010?

A)it will be the same
B)it will be greater
C)it will be less
D)unable to determine from the information given

Question 28

Cabal Company issued debentures with a face interest rate of 6 percent and a market interest rate of 5 percent.How will interest expense compare to the cash interest paid each period?

A)interest expense will be greater
B)interest expense will be less
C)they will be equal
D)unable to determine from the information given

Question 29

All other factors being equal a $1,000,000,10 year,8% face rate convertible bond will differ how from a $1,000,000,10 year,8% nonconvertible bond.

A)Lower market rate of interest and higher cash proceeds
B)Higher market rate of interest and smaller cash proceeds
C)Same Market interest rate and same cash proceeds
D)Lower market interest rate and smaller cash proceeds

Question 30

In a debt instrument,named assets that creditors will receive if the borrower defaults on the note are called:

A)collateral
B)covenants
C)debentures
D)leveraged assets

Question 31

A firm that makes extensive use of long-term liabilities to meet its financing needs is

A)using financial leverage
B)likely to default on these liabilities
C)could be more profitable for its owners than one that doesn't use long-term liabilities
D)both a and c are correct

Question 32

When convertible bonds are exchanged for common stock which of the following is not true?

A)The debt to equity ratio will go up.
B)Interest expense will decrease
C)Times-interest-earned ratio will go up.
D)The bond will not have to be paid at its maturity date.

Question 33

When convertible bonds are exchanged for common stock which of the following is not true?

A)The debt to equity ratio will go down.
B)Interest expense will decrease
C)Times-interest-earned ratio will go up.
D)The bond will not have to be paid at its maturity date.
E)All of the above are true.

Question 34

A bond issue which specifies that certain portions of the total bond issue are due periodically over the life of the bond is called a:

A)serial bond
B)bond indenture
C)registered bond
D)redeemable bond

Question 35

The cash interest paid on a note during a period is equal to the

A)maturity value multiplied times the face interest rate.
B)maturity value multiplied times the effective interest rate.
C)carrying value at the beginning of the period multiplied times the face interest rate
D)carrying value at the beginning of the period multiplied times the effective interest rate

Question 36

All things being equal,a convertible bond will have

A)A higher market interest rate than a comparable nonconvertible bond.
B)A lower market interest rate than a comparable nonconvertible bond.
C)The same market interest rate as a comparable nonconvertible bond.
D)no impact on the market interest rate of the bond.

Question 37

What does discount on a note payable represent?

A)loss from borrowing
B)gain from borrowing
C)additional interest expense over the term of the note
D)additional interest revenue over the term of the note

Question 38

Bonds with a face interest rate receive cash proceeds equal to the present value of the

A)principal to be paid at the maturity date
B)interest to be paid over the term of the bonds
C)interest to be paid over the term of the bonds plus the present value of the principal to be paid at the maturity date
D)interest to be paid over the term of the bonds minus the present value of the principal to be paid at the maturity date

Question 39

The total amount of interest expense over the life of a note is:

A)The face value times the face interest rate times the number of interest payments over the life of the note.
B)The face value of the note times the market interest rate times the number of interest payments over the life of the note.
C)The total of the cash outflows of the note over the life of the note less the proceeds of the note.
D)The proceeds of the note plus the cash interest paid less the maturity value of the note.

Question 40

If a firm's bonds payable are issued at a discount,it is apparent that

A)at the issue date,the face interest rate was less than the market interest rate
B)the firm will be able to pay off the bonds for less than maturity value
C)the bonds must be convertible
D)the bonds have a low rating

Question 41

Which of the following is NOT a true statement about bonds?

A)A company that issues bonds is (typically)borrowing money from the public not a specific person or institution.
B)A bond's prices in the secondary market changes as the market interest changes over time.
C)Bonds can be turned in by their holders prior to their maturity date and receive the bond's face value.
D)When a company issues convertible bonds it will not have to pay the face value of the bonds if the bonds are converted before the bond's maturity date.

Question 42

Why would a lessee rather have an operating lease than a capital lease?

A)operating leases do not require reporting long-term liabilities.
B)capital leases would require larger lease payments
C)operating leases permit a tax deduction for depreciation
D)noncancelable operating leases involve less risk

Question 43

Which of the following is not true about a capital lease?

A)The entire amount of each lease payment is considered rent expense.
B)Is used when the assets leased is in substance purchased.
C)When a capital lease is used an asset is recorded and depreciated over its useful life.
D)When a capital lease is used interest expense is incurred on each payment.

Question 44

While each payment of an installment note is the same amount,which of the following statements is true?

A)All payments will cover the same amount of interest and principal
B)The first payments will cover more interest expense than the later payments.
C)The first payments will cover more principal than the later payments.
D)The first installment payments cover interest until it is paid and then the remaining payments cover the repayment of the principal.

Question 45

Spurt Company issued a 3-year,non-interest-bearing note on January 1,2010.At what amount should the note be reported on the December 31,2010,balance sheet?

A)face amount
B)face amount plus discount amortized
C)face amount plus unamortized discount
D)face amount minus unamortized discount

Question 46

Dighton Corporation is considering issuing a 4 year $500,000 noninterest bearing note,a 4 year annual payment,8 percent face rate,$500,000 installment note,or a 4 year,$500,000,10 percent note.If the market interest rate is 8 percent answer the following:
A.Which note will generate the most cash and which will generate the least?
B.Which note is the most expensive way to borrow fund?

Question 47

Grainfield Corporation first payment on an 8 percent,$40,000,10 year installment,that has quarterly payments is $1,462.23.How much of this first payment is interest?

A)$116.98
B)$800
C)$633.56
D)$320

Question 48

Given a market interest rate of 8 percent,which of the following will generate the largest
cash proceeds and which one has highest borrowing rate?
Note
A.$1,000,000, 20 year, 7% face interest rate
Note
B.$1,000,000, 20 year, 8% face interest rate
Note
C.$1,000,000, 20 year, 9% face interest rate

Question 49

The carrying value of a $500,000,4 year note with an 8 percent face rate (paid semiannually)that was issued to yield 9 percent is $491,031.19.What is the interest expense for the next interest period?

A)$20,000.00
B)$19,641.25
C)$22,096.40
D)$44,192.81

Question 50

Alhambra Corporation is trying to decide between raising needed money by borrowing on a non-interest-bearing note,issuing an ordinary bond,or issuing convertible bonds.Which will probably result in the smallest interest expense?

Question 51

If Walker Corporation issues a $1,000,000 three-year noninterest bearing note how much cash will it receive if the interest rate is 10 percent compounded semiannually?

A)$1,000,000
B)$564,474
C)$746,215
D)$751,315

Question 52

Park Corporation issued a ten-year $10,000,000 bond that had an 8 percent face interest rate that is paid semi-annually when the market interest rate was 6 percent.What are the proceeds generated by this bond issue?

A)$10,000,000
B)$14,265,101
C)$11,487,747
D)$11,472,017

Question 53

Ellis Corporation wants to raise $500,000 by issuing a five year,noninterest-bearing note when the market rate is 8 percent compounded quarterly.What will the face value of the note be?

A)$336,486
B)$742,974
C)$734,664
D)$340,291

Question 54

When considering how to finance the acquisition of an asset,which of the following statements is true?

A)The amount borrowed should be larger than the cost of the assets acquired.
B)The cash flows generated by the assets should dictate the type of note (noninterest bearing,installment,etc)the company uses to finance the asset.
C)The cash flow required by the type of note used should dictate the type of asset acquired.
D)In order to minimize debt the company should not borrow unless there is no cash to fund the acquisition of the asset.

Question 55

Studley Company issued a five-year $5,000,000 bond that had a 8 percent face interest rate that is paid annually when the market interest rate was 10 percent.What are the proceeds of the bond issue?

A)$5,000,000
B)$4,376,889
C)$5,671,008
D)$4,385,543

Question 56

"Obviously,there is no interest expense on a non-interest-bearing note".Is this statement accurate? Explain.

Question 57

Trego Corporation issued a five-year $70,000 installment note with a market interest rate of 9 percent and 60 monthly payments.What is the amount of the monthly payments?

A)$1,453.08
B)$1,166.67
C)$5,812.84
D)$14,316

Question 58

The carrying value of a $500,000,4 year note with an 8 percent face rate (paid semiannually)that was issued to yield a 7 percent market rate is $515,286.36.What is the interest expense for the next interest period?

A)$20,000
B)$18,035.02
C)$20,611.45
D)$36,070.04

Question 59

"All other things being equal,a convertible bond should sell at a higher price than
a straight bond." Is this statement accurate? Why or why not?

Question 60

Once the capital budgeting decision has identified the asset the firm wants to acquire and
the decision is made to use debt financing,how does the firm decided between a
non-interest bearing note,an installment note,or an interest bearing note?

Question 61

Klocke Corporation is planning to issue debentures with a face value of $10,000,000 on September 1,2010.The debentures mature in 10 years and have a face interest rate of 8 percent that is paid semiannually on March 1 and September 1 of each year.Klocke thinks the market interest rate will be 10%.Assume that Klocke has a fiscal year end on Feb 28.
Required:
(A.)Calculate the proceeds of the bond and set up an amortization schedule for the first year of the bond's life.
(B.)Where will the proceeds of the bond be reported on the budgeted financial statements.
(C.)What is the amount of interest expense Klocke will incur in the first year of the bond's life.What amount and where will the interest be reported on the budgeted financial statements for 2011.
(D.)How will the bond be reported on the budgeted balance sheet for 2011.

Question 63

You have just purchased a new Mercedes for $65,000.You have made a $12,000 down payment and have signed an installment note for the $53,000.The note has an interest rate of 8% and calls for you to make twenty quarterly payments starting three months from today.What will be the amount of each quarterly payment on this loan? How much of the first payment will be principal and how much will be interest?

Question 64

The Barton Leasing Company recently purchased printing equipment for $185,296 and wants to lease it to Triple J News Service.If Triple J accepts,it will sign the lease agreement on December 1,2010.The equipment has a useful life of 5 years,and the lease term is for five years.During the year Triple J is responsible for all repairs and maintenance of the leased property.The lease agreement calls for Triple J to make five annual lease payments of $43,705 starting December 1,2010.The interest rate is 9 percent.Triple J has asked you to help it plan for the impact of the lease.
Required:
(A.)What make this a capital lease?
(B.)What is the value of the equipment and the amount of the liability generated by the transaction?
(C.)Prepare a lease payment schedule for the first three lease payments.
(D.)What is the interest cost in each of the first two years of the lease's life?
(E.)How is the lease reported on December 31,2010 on the balance sheet?

Question 65

Boweil Industries is purchasing a new piece of equipment for its manufacturing facilities.The list price of the equipment is $75,000,but the dealer is willing to finance the equipment at 0% interest for 30 months.The financing agreement calls for 30 monthly installment payments of $2,500 each.Boweil's normal cost of borrowing for this type of financing arrangement is 12% annually.What value should Boweil assign to the equipment and the note if the deal is accepted?

Question 67

On Sept 1,2010 Innsbrook Corporation has just issued a $1,000,000 note.The note will have a ten-year life and a 12% face rate of interest that is paid annually.
If the market rate of interest for the note is 10% what will be the proceeds of the note (how much cash will be the maker of the note will receive)?
Set up an amortization table for the note for the two years of the note's life.How much cash interest will Innsbrook pay during the first year of the note's life? How much interest expense will the note incur during the second year of the note's life?

Question 68

On November 1,2010 Michigan Iron works arrange to purchase a $150,000 piece of
equipment by making a 20 percent down payment and signing a three-year installment loan contract with interest at 8 percent per year for the balance.The loan is to be repaid in semiannual installments starting on May 1,2011.
Required:
(A.)How much cash will the company pay out in 2010? Where will the cash outflows appear in the financial statements?
(B.)How much interest expense will the company incur from November 1,2010 to November 1,2011?
(C.)How much of the debt will be reduced in the first year of the note?
(D.)How will the installment note be reported on the balance sheet on December 31,2010?

Question 69

Bandaks Enterprises authorized the issuance of $6,000,000 of 10-year,8% bonds dated March 1,2010,with semiannual interest payment dates of September 1 and March 1.Determine the cash proceeds from the sale of the bonds on March 1,2010 if the bonds are sold to yield 10%.

Question 70

Ogallah Corporation wants to raise$100,000 using a 10 year noninterest bearing note,
What would be the face value of the note if the market interest rate for Ogallah at the
time they signed the note was 6% compounded annually? What is the interest incurred
on the note for the first two years of the note's life?

Question 71

Sprint is planning to issue debentures with a face value of $10,000,000 on September 1,2010.The debentures mature in 10 years and have a face interest rate of 8 percent that is paid semiannually on March 1 and September 1 of each year.Sprint thinks the market interest rate will be 6%.Assume that Sprint has a fiscal year end on Aug 31.
Required:
(A.)Calculate the proceeds of the bond and set up an amortization schedule for the first year of the bond's life.
(B.)Where will the proceeds of the bond be reported on the budgeted financial statements.
(C.)What is the amount of interest expense Sprint will incur in the first year of the bond's life and where will the interest be reported on the budgeted financial statements for August 31,2011.
(D.)How will the bond be reported on the budgeted balance sheet on August 31,2011.

Question 72

If a company wants to raise $40,000 using a 5 year noninterest bearing note,what would be the face value of the note if the market rate is 10% compounded annually? What is the interest incurred on the note in the first year of its life?

Question 73

On April 1,2010 Boston Corporation issued a $2,000,000 note.The note will have a ten-year life and a 6% face rate of interest that is paid annually.
If the market rate of interest for the note is 8% what will be the proceeds of the note (how much cash will be the maker of the note will receive)?
Set up an amortization table for the note for the two years of the note's life.How much cash interest will Boston pay during the first year of the note's life? How much interest expense will the note incur during the second year of the note's life?

Question 74

You have just purchased a new home for $265,000.You have made a $20,000 down payment and have signed an installment note for the $245,000.The note has an interest rate of 5% and calls for you to make 120 monthly payments starting one month from today.What will be the amount of each payment on this loan? How much of the first payment will be principal and how much will be interest?