1. State 2 reasons why Net Present Value is a better decision criteria compared to other alternatives. 2. Why might a company prefer to issue secured bonds rather than unsecured bonds?
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1. State 2 reasons why
2. Why might a company prefer to issue secured bonds rather than unsecured bonds?
Net present value or NPV is an important concept used in capital budgeting. It is considered as a better decision criteria compared to other capital budgeting tools such as payback period, internal rate of return etc.
Bigger companies generally raise capital either by issuing equity in capital markets or through bonds.
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- 1. When the effective cost of debt is greater its the nominal cost,a. the initial net measurement of the bond is more than the face value.b. The net proceeds is more than the face value.c. The entity records a discount on the bond payable.d. The interest expense is less than the interest payments.2. Which of these statement are true? [S1] The dividend decision generally involves the same factors as the earnings retention decision. [S2] Under the Dividend Relevance Theory, dividends are valued more than capital gains.3. The cost of retained earnings is less than the cost of ordinary shares because ofa. the issuance cost.b. the trust fund doctrine.c. agency costs of free cash flow.d. the taxation on earnings.4. GHI Corp., a new and relatively unknown entity, has issued 5-year bonds with an interest rate of 30%. These may also be traded in by the holder for 5 ordinary shares for every P1,000 face value of the bond. GHI added this feature so that once it has better profits, it can entice…Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. A company earns a higher return with borrowed funds than it pays in interest.Which of the following is a disadvantage to a corporation issuing bonds? Group of answer choices A)The required interest payment must be met each period. B)The liquid nature of the bonds makes them attractive to investors who may not want to hold them to maturity. c)The large principal payment due at maturity. d)Both the first and third answers above are both disadvantages. e)The first, second and third answers above are all disadvantages.
- Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. A company earns a lower return with borrowed funds than it pays in interest.tRUE or FALSE One of several reasons that companies might choose to issue bonds is to shift their capital structure from more equity ownership to more borrowing?Which of the following is not a capital market instrument? a. Corporate stock b. Mortgages c. Corporate bonds d. Repurchase agreement
- Which of the following apply to bonds? Select all the apply a. Earns gains from dividends b. Earns gains from interest c. Prices are determined by present value d. Prices are determined by supply and demand e. Have primary and secondary markets f. Have primary markets onlyWhen the effective cost of debt is greater its the nominal cost, *a. The entity records a discount on the bond payable.b. the initial net measurement of the bond is more than the face value.c. The net proceeds is more than the face value.d. The interest expense is less than the interest payments.Under which of the following situation, would a firm most likely to call its outstanding callable bonds? Group of answer choices a)The firm has financial distress. b)The company’s bonds are downgraded. c)The market interest rate increases d)The market interest rate declines
- Which of the following events would make it more likely that a company would choose to call it’s outstanding callable bonds? An increase in market interest rates. An increase in the call premium. All the other statements are correct. The company’s bonds are downgraded. A reduction in market interest rates.Why would a company wish to reduce its bond indebtedness before its bonds reach maturity? Indicate how this can be done and the correct accounting treatment for such a t1. Should financial institutions invest in junk bonds? 2. Explain the use of call provisions on bonds. How can a call provision affect the price of the bond?3. What are protective covenants? Are they needed? Explain why.