Intermediate Financial Management (MindTap Course List)
13th Edition
ISBN: 9781337395083
Author: Eugene F. Brigham, Phillip R. Daves
Publisher: Cengage Learning
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Chapter 4, Problem 17MC
Summary Introduction
Case summary:
Person SS and Person ST are the vice presidents of M insurance company and also the co-directors for pension and management division of the company. The new clients NM alliance wants company M to make a seminar to the mayors of the cities and person SS and person ST will take the actual presentation. Person X helps them by way of answering their questions.
Characters in the case:
- Person SS
- Person ST
- Person X
To determine: The term bankruptcy and whether the company will liquidates immediately if the firm default on its bonds and whether the bond holders are assured to get their all promised payments.
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Briefly describe bankruptcy law. If a firm wereto default on its bonds, would the company beliquidated immediately? Would the bondholdersbe assured of receiving all of their promisedpayments?
Why would the company redeem the bonds prior to the maturity date if they were going to recognize a loss? Can you think of an example of such a decision we might face in our personal lives?
Assume that a firm had such serious financial problems that it was about to be liquidated after a bankruptcy. All of the firm's assets are about to be sold in order to pay the following claims against the firm: bondholders, preferred stockholders, common stockholders, and federal income taxes. Of the claims mentioned, what priority would common stockholders have?
A.
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Chapter 4 Solutions
Intermediate Financial Management (MindTap Course List)
Ch. 4 - Short-term interest rates are more volatile than...Ch. 4 - The rate of return on a bond held to its maturity...Ch. 4 - If you buy a callable bond and interest rates...Ch. 4 - A sinking fund can be set up in one of two ways....Ch. 4 - Prob. 1PCh. 4 - Prob. 2PCh. 4 - Current Yield for Annual Payments Heath Food...Ch. 4 - Determinant of Interest Rates
The real risk-free...Ch. 4 - Default Risk Premium A Treasury bond that matures...Ch. 4 - Prob. 6P
Ch. 4 - Bond Valuation with Semiannual Payments
Renfro...Ch. 4 - Prob. 8PCh. 4 - Bond Valuation and Interest Rate Risk The Garraty...Ch. 4 - Prob. 10PCh. 4 - Prob. 11PCh. 4 - Bond Yields and Rates of Return A 10-year, 12%...Ch. 4 - Yield to Maturity and Current Yield You just...Ch. 4 - Current Yield with Semiannual Payments
A bond that...Ch. 4 - Prob. 15PCh. 4 - Interest Rate Sensitivity
A bond trader purchased...Ch. 4 - Bond Value as Maturity Approaches An investor has...Ch. 4 - Prob. 18PCh. 4 - Prob. 19PCh. 4 - Prob. 20PCh. 4 - Bond Valuation and Changes in Maturity and...Ch. 4 - Yield to Maturity and Yield to Call
Arnot...Ch. 4 - Prob. 23PCh. 4 - Prob. 1MCCh. 4 - Prob. 2MCCh. 4 - How does one determine the value of any asset...Ch. 4 - Prob. 4MCCh. 4 - What would be the value of the bond described in...Ch. 4 - Suppose a 10-year, 10% semiannual coupon bond with...Ch. 4 - Prob. 9MCCh. 4 - Prob. 10MCCh. 4 - Prob. 11MCCh. 4 - Prob. 12MCCh. 4 - Prob. 14MCCh. 4 - Prob. 15MCCh. 4 - Prob. 16MCCh. 4 - Prob. 17MC
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- Explain how a firm loses value during the bankruptcy process from both a creditors and a shareholders perspective.arrow_forwardIndicate whether the following statement is true or false.Provide the relevant explanations. In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)arrow_forwardIf a bankruptcy is deemed likely to occur and is reasonably estimated, what would be the recognition and disclosure requirements for the company?arrow_forward
- Which of the following statements is most correct? Why?* choices: a. The expected return on corporate bonds will generally exceed the yield to maturity. b. Firms that are in financial distress are forced to declare bankruptcy. c. All else equal, senior debt will generally have a lower yield to maturity than subordinated debt. d. Statements a and c are correct. e. None of the statements above is correct.arrow_forwardIndicate whether each of the following actions will increase or decrease a bond’s yield tomaturity:a. The bond’s price increases.b. The bond is downgraded by the rating agencies.c. A change in the bankruptcy code makes it more difficult for bondholders to receivepayments in the event the firm declares bankruptcy.d. The economy seems to be shifting from a boom to a recession. Discuss the effects ofthe firm’s credit strength in your answer.e. Investors learn that the bonds are subordinated to another debt issue.arrow_forward52. Which of the following statements is incorrect?a. Firms will often voluntarily enter bankruptcy before they are forcedinto bankruptcy by their creditors.b. An indenture is a bond that is less risky than a subordinateddebenture.c. When a firm files for Chapter 11 bankruptcy, it may attempt torestructure its existing debt by changing (subject to creditorapproval) the interest payments, maturity, and/or principal amount.d. All else equal, mortgage bonds are less risky than debentures becausemortgage bonds provide investors with a lien (that is, a claim)against specific property.e. A company’s bond rating is affected by financial performance andprovisions in the bond contract.arrow_forward
- Indicate whether each of the following statements is true or false. Support your answers with the relevant explanations. In the presence of bankruptcy risk, the cost of capital of a company with debt is always higher than the cost of capital of an unlevered company. (Explain your reasoning – in your explanation, provide a numerical example supporting your answer.)arrow_forwardWhich statement is FALSE regarding the difference between shareholders and bondholders? * Bondholders are mere creditors of the company to whom the company has to repay a certain amount. Shareholders are the real owners in the company. Shareholders have more rights (voting rights, priority at times of bankruptcy, payment preferences) than bondholders. Shareholders are more exposed to risks than bondholders.arrow_forwardD3) Finance What is an Example of Bankruptcy Claims Priorities? What is a bank liquidation operation?arrow_forward
- A friend has mentioned that she has read somewhere that the following variables can be used to predict bankruptcy: (a) the company debt ratio; (b) the interest coverage; (c) the amount of cash relative to sales or assets; (d) the return on assets; (e) the market-to-book ratio; (f) the recent return on the stock; (g) the volatility of the stock returns. The problem is that she can’t remember whether a high value of each variable implies a high or a low probability of bankruptcy. Can you help her out?arrow_forwardIn case of bankruptcy: Preferred shareholders get their money first, then creditors, common shareholders are the last group to get their money back Bondholders get their money first, then preferred shareholders, common shareholders are the last group to get their money back Preferred shareholders get their money first, then banks, common shareholders are the last group to get their money back None of the abovearrow_forwardAn investor that owns convertible bonds in a deteriorating company would realize a higher return on his/her investment by converting the bond immediately before bankruptcy. True or False.arrow_forward
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