Which of the following is a disadvantage of using bonds? a. Bondholders do not participate in extraordinary profits; the payments are limited to interest. b. Bondholders do not have voting rights. c. Debt (other than income bonds) produces fixed charges, increasing the firm’s financial leverage. d. Flotation costs of bonds are generally lower th

Which of the following is a disadvantage of using bonds? a. Bondholders do not participate in extraordinary profits; the payments are limited to interest. b. Bondholders do not have voting rights. c. Debt (other than income bonds) produces fixed charges, increasing the firm’s financial leverage. d. Flotation costs of bonds are generally lower th

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 21QTD

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Which of the following statements is CORRECT? a. One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature. b. Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds. c. Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees. d. Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond. e. A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
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.
You are working for a mid-sized company that is looking to estimate its cost of debt. The company has never had an issuance in the bond market. What would be the best proxy to estimate its cost of debt? A. Cost of its bank debt B. Cost of its equity C. Cost of debt from companies of a similar market capitalization D. Cost of debt in the corporate bond market
Which of the following events would make it more likely that a company would choose to call its outstanding callable bonds? a. Market interest rates rise sharply. b. Market interest rates decline sharply. c. The company's nancial situation deteriorates signicantly. d. Ination increases signicantly. e. The company's bonds are downgraded. Please explain.
Which of the following statements is CORRECT? a. Convertible bonds generally have lower coupon rates than non-convertible bonds of similar default risk because they offer the possibility of capital gains. b. A debenture is a secured bond that is backed by some or all of the firm's fixed assets. c. Junk bonds typically provide a lower yield to maturity than investment-grade bonds. d. A company's subordinated debt has less default risk than its senior debt. e. Senior debt is debt that has been more recently issued, and in bankruptcy it is paid off after junior debt because the junior debt was issued first.
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.
Which of the following is an advantage of debt financing? a. Excessive debt increases the risk of equity holders and therefore depresses share price. b. The obligation is generally fixed in terms of interest and principal payments. c. Interest and principal obligations must be paid regardless of the economic position of the firm. d. Debt agreements contain covenants.
when are corporations likely they called the Bonds? A. When the market interest rate is higher than the contract rate, b. When the contract rate is higher than the market rate. C. When their bonds at selling at par with market d. When standard and poor are bullish about treasury bills E. None of the above
There are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing? a. The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest b. The repayment of debt capital may affect the liquidity of the company c. If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets d. The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares e. Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the company
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
True or False: Corporations are very interested in their potential bond rating as it impacts their cost of capital. The spread of a bond is common term used by investors. The spread of a bond is that additional compensation for the risk of a bond (relative to a risk free rate). The spread on Junk or High Yield Bonds is generally higher than the spread on bonds rated BBB or higher.
Which ot the following features would decrease the value of a corporate bond? A.The bond is sinior debt obligation B.The bond is convertible into shares C.The bond is secured by a mortgage on real estate D.The borrower has the option to repay the loan before maturity