Deck 13: Long-Term Debt and Leasing

Question 1

Suppose a firm is asked to pledge collateral for a term loan.Which of the following is likely to be least acceptable to the lender?

A) a rare book collection owned by the company.
B) the firm's inventory of industrial chemicals.
C) the firm's real estate holding.
D) securities held by the firm for investment.

Answer 1

a rare book collection owned by the company.

Question 2

Wuzzy,Inc.is evaluating the acquisition of a new car for deliveries.Automobile leases are

A) typically operating leases.
B) typically financial (capital)leases.
C) either operating or financial,depending on the firm.
D) not covered by these categories.

Answer 2

typically operating leases.

Question 3

A call feature

A) allows the bondholder to redeem the bond prior to maturity.
B) allows the bond issuer to redeem the bond prior to maturity.
C) allows the bondholder to increase the coupon rate on the bond at specific points in time over the bond's life.
D) forces the bond issuer to buy back the bond prior to maturity at the bondholder's discretion.

Answer 3

allows the bond issuer to redeem the bond prior to maturity.

Question 4

An important consideration in the lease versus purchase decision is

A) the loss of the depreciation tax shield if leased.
B) the benefit of the lease payment as a tax deduction.
C) the effect on financial structure and future funding needs.
D) all of the above.

Question 5

A balloon payment is

A) payment made on circus debt.
B) a large front-end debt payment,followed by smaller payments.
C) a large lump-sum payment at maturity of a debt.
D) none of the above.

Question 6

All else equal,the higher the call premium,

A) the smaller the drop in rates necessary for a call to be beneficial.
B) the larger the drop in rates necessary for a call to be beneficial.
C) the more likely any rate drop will lead to a call.
D) none of the above; the call premium does not affect the call decision.

Question 7

NARRBEGIN: Loose Cannon refunding
Loose Cannon Co.
Loose Cannon Co.is evaluating a new $75 million bond issue,the proceeds of which would be used to call and retire its outstanding $75 million bonds.Details on both bond issues are presented below.The firm is in the 35% tax bracket.
Old Bonds The old issue sold at par,with a coupon rate of 11 percent.It was issued five years ago with a twenty year maturity.The issue had $350,000 in flotation costs and carries a call price of $1150.
New Bonds The new issue are expected to sell at par with an 8.5 percent coupon rate and a 15 year maturity.Flotation costs are forecast to be $500,000.Interest payments will overlap for 2 months while the old bonds are retired.
Refer to Loose Cannon Co.What is the initial investment required to refund the bonds?

A) $11,250,000
B) $8,614,375
C) $7,312,500
D) $3,937,500

Question 8

The feature in a bond indenture that requires systematic retirement of the bond issue is a

A) planned call provision.
B) sinking fund provision.
C) forced conversion provision.
D) mandated redemption provision.

Question 9

Quiz Company has a 12 year lease,with payments of $250,000 made at the beginning of each year.If no purchase option exists,and the company is in the 40% tax bracket,what is the annual after-tax cash outflow on the lease?

A) $416,667
B) $250,000
C) $150,000
D) $100,000

Question 10

Callable bonds may not be called immediately after a rate decrease because

A) the call price if often at a premium above par value.
B) the call provision is often deferred for several years after the bond's issue.
C) recalling the old bonds and issuing new ones involves non-trivial flotation costs.
D) all of the above.

Question 11

NARRBEGIN: Bear Lake Lease Purchase
Bear Lake Equipment Company (BLEC)
Bear Lake Equipment Company (BLEC)is considering an expansion which will require a new machine that costs $125,000.BLEC can either lease or buy the equipment.The company's tax rate is 40% and its after tax cost of debt is 5%.
Lease: Annual payments of $26,400 made at the beginning of each year over five years.The lessor covers all maintenance,while the lessee covers insurance and other costs.The lessee has the option to purchase the machine for $31,250 paid along with the final lease payment.
Purchase: The $125,000 cost will be financed over five years with annual end of year payments of $31,580.The machine will be depreciated on the five year MACRS schedule,and the firm will pay $3,500 per year for a service contract to cover all maintenance.The company will cover all insurance and other costs.
Refer to BLEC.What is the after-tax cash flow per year for the lease?

A) $26,400
B) $15,840
C) $10,560
D) $39,600

Question 12

Booyah Company has a callable bond issue,with 55,000 bonds with $1000 par outstanding.If the call price is $1125 per bond,and Booyah's tax rate is 35%,what is the after-tax cost of calling the bonds?

A) $10,576,925
B) $2,406,250
C) $6,875,000
D) $4,468,750

Question 13

How do project finance (PF)loans differ from other syndicated loans?

A) PF loans are guaranteed by the borrower,while other syndicated loans are not.
B) PF loans are issued to special stand-alone companies whose sole purpose is the construction and operation of a single project.
C) PF loans are issued in multiple currencies,while most other syndicated loans are issued in a single currency.
D) All of the above are true.

Question 14

NARRBEGIN: Bear Lake Lease Purchase
Bear Lake Equipment Company (BLEC)
Bear Lake Equipment Company (BLEC)is considering an expansion which will require a new machine that costs $125,000.BLEC can either lease or buy the equipment.The company's tax rate is 40% and its after tax cost of debt is 5%.
Lease: Annual payments of $26,400 made at the beginning of each year over five years.The lessor covers all maintenance,while the lessee covers insurance and other costs.The lessee has the option to purchase the machine for $31,250 paid along with the final lease payment.
Purchase: The $125,000 cost will be financed over five years with annual end of year payments of $31,580.The machine will be depreciated on the five year MACRS schedule,and the firm will pay $3,500 per year for a service contract to cover all maintenance.The company will cover all insurance and other costs.
Refer to BLEC.What is the present value of the five years of after-tax cash flows from purchasing the machine?

A) $92,504
B) $108,120
C) $77,351
D) $123,273

Question 15

NARRBEGIN: Bear Lake Lease Purchase
Bear Lake Equipment Company (BLEC)
Bear Lake Equipment Company (BLEC)is considering an expansion which will require a new machine that costs $125,000.BLEC can either lease or buy the equipment.The company's tax rate is 40% and its after tax cost of debt is 5%.
Lease: Annual payments of $26,400 made at the beginning of each year over five years.The lessor covers all maintenance,while the lessee covers insurance and other costs.The lessee has the option to purchase the machine for $31,250 paid along with the final lease payment.
Purchase: The $125,000 cost will be financed over five years with annual end of year payments of $31,580.The machine will be depreciated on the five year MACRS schedule,and the firm will pay $3,500 per year for a service contract to cover all maintenance.The company will cover all insurance and other costs.
Refer to BLEC.What is the after tax cash flow for the first year from a purchase of the machine?

A) $31,583
B) $21,167
C) $19,515
D) $25,000

Question 16

NARRBEGIN: Loose Cannon refunding
Loose Cannon Co.
Loose Cannon Co.is evaluating a new $75 million bond issue,the proceeds of which would be used to call and retire its outstanding $75 million bonds.Details on both bond issues are presented below.The firm is in the 35% tax bracket.
Old Bonds The old issue sold at par,with a coupon rate of 11 percent.It was issued five years ago with a twenty year maturity.The issue had $350,000 in flotation costs and carries a call price of $1150.
New Bonds The new issue are expected to sell at par with an 8.5 percent coupon rate and a 15 year maturity.Flotation costs are forecast to be $500,000.Interest payments will overlap for 2 months while the old bonds are retired.
Refer to Loose Cannon Co.What is the NPV of the refunding decision?

A) $3,654,164
B) $5,356,375
C) $1,224,292
D) $8,614,375

Question 17

The yield curve's typical shape suggests

A) short term debt will carry higher interest rates than long term debt.
B) short term debt will carry about the same rates as long term debt.
C) short term debt will carry lower rates than long term debt.
D) nothing about the differences in rates due to maturity difference.

Question 18

If a 9%,$100,000 loan has a balance of $83,724 and an annual payment of $13,965 is to be made,what will the allocation of principal and interest be?

A) $9,000 interest,$4,965 principal
B) $7,535 interest,$6,430 principal
C) $6,430 interest,$7,535 principal
D) $4,965 interest,$9,000 principal

Question 19

Contract terms that specify things a borrower "must"do are referred to as

A) instructive covenants
B) informative covenants
C) negative covenants
D) positive covenants

Question 20

NARRBEGIN: Loose Cannon refunding
Loose Cannon Co.
Loose Cannon Co.is evaluating a new $75 million bond issue,the proceeds of which would be used to call and retire its outstanding $75 million bonds.Details on both bond issues are presented below.The firm is in the 35% tax bracket.
Old Bonds The old issue sold at par,with a coupon rate of 11 percent.It was issued five years ago with a twenty year maturity.The issue had $350,000 in flotation costs and carries a call price of $1150.
New Bonds The new issue are expected to sell at par with an 8.5 percent coupon rate and a 15 year maturity.Flotation costs are forecast to be $500,000.Interest payments will overlap for 2 months while the old bonds are retired.
Refer to Loose Cannon Co.What are the annual cash flows associated with the new bonds?

A) $4,143,750
B) $6,375,000
C) $4,132,083
D) $6,357,051

Question 21

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What is the tax reduction caused by the unamortized flotation costs?

A) $500,000
B) $333,333
C) $56,667
D) $256,472

Question 22

A bond where the investor is granted the right to receive payment in shares of underlying stock rather than in cash is called a

A) junk bond
B) zero-coupon bond
C) convertible bond
D) bearer bond

Question 23

Bonds that received investment-grade ratings when first issued but later fell to junk status are known as:

A) disgraced stars.
B) shamed debt.
C) fallen angels.
D) dead wood.

Question 24

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What is the tax reduction caused by the unamortized discount on the old bonds?

A) $1,500,000
B) $1,000,000
C) $340,000
D) $187,000

Question 25

A contractual clause that requires a borrower to pay taxes and other liabilities when due is an example of a

A) positive covenant
B) negative covenant
C) lien
D) term loan

Question 26

The user of an asset in a leasing arrangement is called the

A) lessor
B) lessee
C) trustee
D) none of the above

Question 27

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
How much overlapping interest does Bavarian Brew have to pay on the old bonds after taxes?

A) $585,000
B) $386,100
C) $198,900
D) $494,500

Question 28

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What are the annual after tax interest payments on the old bond?

A) $1,544,400
B) $2,340,000
C) $795,600
D) $1,858,900

Question 29

A bond issue with specifically designated bonds maturing each year is a(n)

A) mandated redemption issue.
B) sinking issue.
C) serial issue.
D) sequential issue.

Question 30

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What are the annual tax savings from the amortization of the flotation costs on the old bond?

A) $11,333
B) $33,333
C) $21,999
D) $18,988

Question 31

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What is the after tax cost of the call premium?

A) $3,300,000
B) $1,122,000
C) $2,178,000
D) $2,867,000

Question 32

Which of the following is (are)an advantage(s)to leasing rather than purchasing?

A) Leasing effectively allows for the depreciation of land.
B) A lease does not have a stated interest cost.
C) A lessee generally cannot make improvements to the leased property.
D) At the end of the lease,the lessor realizes any salvage value of the leased property.

Question 33

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What are the annual tax savings from the amortization of the discount on the old bond?

A) $1,500,000
B) $30,600
C) $160,000
D) $61,200

Question 34

An unsecured bond that only creditworthy firms can issue is called a

A) mortgage bond
B) collateral trust bond
C) debentures
D) junk bond

Question 35

Specialized equipment that may become obsolete quickly

A) may be more attractive to purchase than lease.
B) may be more attractive to lease than purchase.
C) cannot easily be evaluated in the lease versus purchase context.
D) should be deferred until newer equipment is available.

Question 36

The legal document stating the conditions under which a bond is issued is called the

A) indenture
B) trustee
C) covenant
D) call provision

Question 37

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What is the initial investment in the new bond issue?

A) $2,635,767
B) $3,542,433
C) $2,178,000
D) $2,845,433

Question 38

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What is the call premium per bond?

A) $110
B) $100
C) $90
D) $125

Question 39

Prior to FASB No.13,leasing could be used

A) to finance assets used in the firm without balance sheet consequences.
B) but lease payments were not expensed on the income statement.
C) only by largest corporations.
D) but its advantages were fewer than under the present standard.

Question 40

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What are the annual after tax savings from paying off the old bonds?

A) $985,270
B) $1,544,400
C) $1,256,569
D) $1,502,467

Question 41

Which of the following is also referred to as asset-backed lending?

A) term loans
B) syndicated loans
C) project finance loans
D) all of the above

Question 42

If a bond issue has a sinking fund provision then

A) the corporation makes payments,based upon a preconceived schedule,to a trustee who uses these funds to retire bonds by purchasing them in the marketplace.
B) the indenture allows the value of the bonds to fall to a pre-identified price before default occurs.
C) a certain portion of the interest payments on the bond are used to retire bonds by purchasing them in the marketplace.
D) none of the above.

Question 43

A clause in a borrowing agreement that requires the firm to maintain a given level of debt- equity is

A) a negative covenant.
B) a positive covenant.
C) an active covenant.
D) none of the above

Question 44

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What are the annual after tax debt payments on the new bond?

A) $1,112,700
B) $1,148,400
C) $1,235,300
D) $1,478,900

Question 45

Which of the following would generally be assumed to increase the cost of debt for a firm?

A) issuing bonds that have a longer-maturity than usual
B) having a bond issue that is much larger than that of similar sized firms in the same industry
C) having a bond issue that is convertible into commons stock
D) both a and b

Question 46

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What is the NPV of the proposed bond refinancing?

A) $907,484
B) -$907,484
C) -$895,453
D) $895,453

Question 47

Accountants classify debt as long-term if

A) the debt is financing a long-term asset.
B) the debt matures in more than one year.
C) the debt matures in more than 6 months.
D) it is interest bearing.

Question 48

You are contemplating leasing a new car.The monthly lease payments (to be made at the end of each months)are $299 for 36 months.At the end of the lease you have the option of purchasing the car for $17,800.If you could buy the car today for $22,500,what is the implicit interest on the lease?

A) 9.942%
B) .8285%
C) 12.345%
D) 7.852%

Question 49

Which of the following is typically arranged for infrastructure projects such as bridges and power plants?

A) term loans
B) syndicated loans
C) project finance
D) all of the above

Question 50

A firm issues a bond which is secured by a building that the firm will buy with the loan proceeds.What type of bond has the firm issued?

A) debenture
B) income bond
C) mortgage bond
D) none of the above

Question 51

Bavarian Brew Lease
Bavarian Brew wants to lease a new bottling machine. The company obtains a 10 year lease requiring annual payments of $15,000 at the beginning of the year. The firm is expected to exercise its option to purchase the machine at the termination of the lease for $10,000 at the end of year 10. The company is in the 35% tax bracket.

Bavarian Brew has also the option to purchase the machine.If the present value of the cash flows associated with the purchase is $78,000,what is the net present value of the lease option? Assume that the company's cost of debt is 7%.

A) $8,870
B) -$8,870
C) $7,950
D) -$7,950

Question 52

Private debt can take the form of

A) a private debt agreement arranged between corporate borrowers and financial institutions.
B) an unregistered security offering sold directly to accredited investors.
C) both a and b.
D) none of the above

Question 53

If a corporation is looking for a loan that is too large for any one bank to lend to the corporation,then what type of loan will the firm most likely have to take out?

A) term loan
B) syndicated loan
C) project finance loan
D) none of the above

Question 54

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What are the annual tax savings from the amortization of the flotation cost of the new bonds?

A) $11,900
B) $35,700
C) $23,100
D) $27,500

Question 55

The vast majority of external capital raised by companies each year is

A) common stock.
B) preferred stock.
C) short-term debt.
D) long-term debt.

Question 56

Bavarian Brew Lease
Bavarian Brew wants to lease a new bottling machine. The company obtains a 10 year lease requiring annual payments of $15,000 at the beginning of the year. The firm is expected to exercise its option to purchase the machine at the termination of the lease for $10,000 at the end of year 10. The company is in the 35% tax bracket.

What is the annual after tax cash flow for Bavarian Brew from the lease?

A) $15,000
B) $9,750
C) $5,250
D) $12,550

Question 57

Bavarian Brew Lease
Bavarian Brew wants to lease a new bottling machine. The company obtains a 10 year lease requiring annual payments of $15,000 at the beginning of the year. The firm is expected to exercise its option to purchase the machine at the termination of the lease for $10,000 at the end of year 10. The company is in the 35% tax bracket.

If Bavarian Brew capitalizes the lease,what would be the value of the corresponding asset on the company's balance sheet?

A) $80,461
B) $76,960
C) $72,580
D) $83,890

Question 58

You are contemplating leasing a new car.The monthly lease payments (to be made at the end of each months)are for 36 months.At the end of the lease you have the option of purchasing the car for $17,800.If you could finance the car at 5.9% for the same period,what is the most that you should be willing to pay in monthly lease payments if the sticker price of the car is $25,800?

A) $331
B) $299
C) $413
D) $199

Question 59

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What are the annual net cash flow savings from issuing the new bonds?

A) $236,734
B) $478,923
C) $386,367
D) $529,645

Question 60

NARRBEGIN: Bavarian Brew Bond
Bavarian Brew Bond
Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34%
Refer to Bavarian Brew Bond.What are the annual after tax interest cost on the new bond?

A) $1,148,400
B) $1,740,000
C) $591,600
D) $967,500

Question 61

Which type of lease has a term which is generally shorter than the economic life of the asset being leased?

A) operating lease
B) capital lease
C) financial lease
D) leveraged lease

Question 62

What is the accounting capitalized value of an operating lease that involves payments of $8,000 per year (at the end of each year)for 12 years with no possibility of purchase at the end of the lease term.Assume that the firm is in the 35% marginal tax rate and the pre-tax cost of debt for the firm is 12%?

A) $96,000.00
B) $49,554.99
C) $39,596.96
D) $32,210.75

Question 63

With respect to the size of a loan:

A) the larger the loan the better the economies of scale with respect to loan administration costs per dollar borrowed.
B) the greater the risk to the lender because larger loans result in less diversification.
C) there is a risk trade-off associated with net administrative costs.
D) all of the above
E) (a)and (b)only

Question 64

Another term for junk bonds is

A) low-risk bonds
B) low-yield bonds
C) high-yield bonds
D) vulture bonds

Question 65

A bond issued by an international borrower and sold to investors in countries with currencies other than the currency in which the bond is denominated is called

A) a Eurobond
B) an Alien bond
C) a Cross-currency bond
D) none of the above

Question 66

What are the basic type of leases available to businesses?

A) operating leases
B) financial leases
C) capital leases
D) all of the above

Question 67

You are interested in leasing an automobile for your company.You find that the lessor is offering you a 5-year lease on a car when the economic life on this car is considered to be 5.5 years.What type of lease must this be classified as if you agree to the terms?

A) lease and saleback
B) capital lease
C) operating lease
D) lease of convenience

Question 68

A loan made by an institution to a business with an initial maturity of more than 1 year,generally 5 to 12 years,is known as a(n):

A) Eurocurrency loan
B) Treasury bill
C) syndicated loan
D) term loan
E) stock purchase warrant

Question 69

What is the present value of an operating lease that involves payments of $8,000 per year (at the end of each year)for 12 years with no possibility of purchase at the end of the lease term.Assume that the firm is in the 35% marginal tax rate and the pre-tax cost of debt for the firm is 12%?

A) $60,918.39
B) $49,554.99
C) $39,596.96
D) $32,210.75

Question 70

What is the present value of an operating lease that involves payments of $5,000 per year (the end of the year)for 10 years with no possibility of purchase at the end of the lease term.Assume that the firm is in the 40% marginal tax rate and the pre-tax cost of debt for the firm is 8%?

A) $38,986.43
B) $23,391.86
C) $20,130.24
D) $18,000.00

Question 71

If a bond has a sinking fund provision then the actual maturity of the bond will probably be

A) greater than the stated maturity on the bond.
B) exactly equal to the state maturity on the bond.
C) less than the stated maturity on the bond.
D) none of the above.

Question 72

NARRBEGIN: Speed Racer,Inc.
Speed Racer,Inc.
Speed Racer,Inc.is thinking about retiring a $100,000,000 issue of bonds that it sold to the public 20 years ago.The original maturity date for the bonds was 30 years.
Refer to Speed Racer,Inc.If the bonds were initially sold at 98,then what is the after-tax cash flow effect,today,of the accelerated amortization if Speed Racer is in the 40% marginal tax bracket?

A) $26,666.67
B) $266,666.67
C) $800,000.00
D) $1,306,666.67

Question 73

What is most likely to cause a situation where a callable bond will be called by the issuer?

A) the value of the bond has dropped by a significant amount
B) the yield on the bond has increased by a significant amount
C) the yield on the bond has decreased by a significant amount
D) any of the above

Question 74

If a borrower violates a covenant the lender may:

A) demand immediate repayment
B) waive the violation and continue the loan
C) waive the violation but alter the terms of the original debt agreement
D) any of the above are possible

Question 75

Whose responsibility is it to serve as the "watchdog" on behalf of the bondholders?

A) custodian
B) trustee
C) wall street
D) none of the above

Question 76

Which of the following is not an example of a negative covenant?

A) Borrowers may not sell accounts receivable to generate cash.
B) The borrower is required to maintain a minimum level of net working capital.
C) Constraints associated with fixed assets regarding the liquidation,acquisition and encumbrance.
D) Constraints associated with consolidation,merging or combining with another firm.
E) All of the above are examples of negative covenants.

Question 77

Which of the following statements is true?

A) U.S.Treasury securities with relevant maturities are used as the basic cost of money and lenders add premiums for risk and other factors.
B) Some lenders determine a prospective borrower's risk class and determine the rates charged on loans with similar maturities by firms in the same risk class.
C) All borrowers are charge the same rate regardless of their risk class.
D) Both (a)and (b)are true
E) None of the above statements are true.

Question 78

For a typical callable bond,what is the call price for 8% coupon bond?

A) $920
B) $1,000
C) $1,080
D) there is not enough information to determine

Question 79

NARRBEGIN: Speed Racer,Inc.
Speed Racer,Inc.
Speed Racer,Inc.is thinking about retiring a $100,000,000 issue of bonds that it sold to the public 20 years ago.The original maturity date for the bonds was 30 years.
Refer to Speed Racer,Inc.If the bonds were initially sold at 98,then what is the dollar amount of the unamortized discount that would be accelerated at retirement?

A) $66,666.67
B) $666,666.67
C) $2,000,000.00
D) $3,266,666.67

Question 80

In an operating lease,which party is typically responsible for maintenance costs on the asset?

A) the lessor
B) the lessee
C) the third party financing the asset
D) all of the above