FIN 650 GC Week 8 Exam 3 Latest

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A. If new debt is used to refund old debt, the correct discount rate to use in the refunding analysis is the before-tax cost of new debt. B. The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity. C. The mechanics of finding the NPV of a refunding decision are fairly straightforward. However, the decision of when to refund is not always clear because it requires a forecast of future interest rates. D. If a firm with a positive NPV refunding project delays refunding and interest rates rise, the firm can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though it actually refunds the debt after rates have risen. E. Suppose a firm is considering refunding and interest rates rise during time when the analysis is being done. The rise in rates would tend to lower the expected price of the new bonds, which would make them cheaper to the firm and thus increase the expected interest savings. Question 11. 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 A. equity cash flows. B. capital budgeting project cash flows. C. debt cash flows. D. pension fund cash flows. E. sales. Question 12. Chapter 7 of the Bankruptcy Act is designed to do which of the following? A. Protect shareholders against creditors. B. Establish the rules of reorganization for firms with projected cash flows that eventually will be sufficient to meet debt payments. C. Ensure that the firm is viable after emerging from bankruptcy. D. Allow the firm to negotiate with each creditor individually. E. Provide safeguards against the withdrawal of assets by the owners of the bankrupt firm and allow insolvent debtors to discharge all of their obligations and to start over unhampered by a burden of prior debt Question 13. In the event of bankruptcy under the federal bankruptcy laws, debtholders have a prior claim to a firm's income and assets before both common and preferred stockholders. Moreover, in a bankruptcy all debtholders are treated equally as a single class of claimants. • True False Question 14. Which of the following statements concerning common stock and the investment banking process is NOT CORRECT? A. The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue.
B. If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market. C. Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and reputation probably outweigh the additional costs to the firm. D. Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer. E. The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue. Question 15. Which of the following statements about listing on a stock exchange is most CORRECT? A. Listing is a decision of more significance to a firm than going public. B. Any firm can be listed on the NYSE as long as it pays the listing fee. C. Listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business. D. Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC. E. The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE. Question 16. Heavy use of off-balance sheet lease financing will tend to A. make a company appear more risky than it actually is because its stated debt ratio will be increased. B. make a company appear less risky than it actually is because its stated debt ratio will appear lower. C. affect a company's cash flows but not its degree of risk. D. have no effect on either cash flows or risk because the cash flows are already reflected in the income statement. E. affect the lessee’s cash flows but only due to tax effects. Question 17. Stanley Inc. must purchase $6,000,000 worth of service equipment and is weighing the merits of leasing the equipment or purchasing. The company has a zero tax rate due to tax loss carry-forwards, and is considering a 5-year, bank loan to finance the equipment. The loan has an interest rate of 10% and would be amortized over 5 years, with 5 end-of-year payments. Stanley can also lease the equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment. A. $177,169 B. $196,854 C. $207,215 D. $217,576 E. $228,455
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FIN 650 GC Week 8 Exam 3 Latest

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