Fin 516 Quiz 2

1. Question (TCO D) Which of the following factors would increase the likelihood that a company would call its prominent bonds at this time? (a) The yield to maturity on the companys outstanding bonds increases due to a weakening of the firms financial situation. (b) A provision in the bond indenture lowers the call price on specific dates, and yesterday was atomic number 53 of those dates. (c) The flotation costs associated with issuing untried bonds rise. (d) The firms CFO believes that chase order are likely to decline in the future. e) The firms CFO believes that corpo identify tax rates are likely to be increased in the future. Student resolve (b) A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates. Instructor invoice Answer is b Chapter 20, pp. 810 815 Points Received 20 of 20 Comments 2. Question (TCO D) The State of Idaho issued $2,000,000 ofseven percentcoupon, 20-year biennial payment, ta x-exempt bondsfive years ago.The bonds hadfive years of call protection, but now the state can call the bonds if it chooses to do so. The call tribute would befive percentof the face amount. Today 15-year, five percent, semiannual payment bonds can be sold at par, but flotation costs on this issue would be two percent. What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are not relevant. (a) $278,606 (b) $292,536 (c) $307,163 (d) $322,521 (e) $338,647 Student Answer (a) $278,606 Cost of refunding Call agiotage = 5% (2mil) = 100,000 Floatation cost = 2% (2mil) = 40,000 Total investment outlay = 140,000 fill on old bond = 7%/2(2mil) = 70,000 Interest on new bond = 5%/2(2mil) = 50,000 Savings = 20,000 PV of nest egg, 30 periods at 5%/2 = 418,606 NPV of refunding = PV of savings cost of refunding = 278,606 Instructor Explanation Answer is a Chapter 20, pp. 810 815 Call premium 5% middle-aged rate 7% floatation % 2% New rate 5% Amount $2 ,000,000 Years 15Cost of refunding Call premium = 5% ($2,000,000) $100,000 Flotation cost = 2% ($2,000,000) $ 40,000 Total investment outlay $140,000 Interest on old bond per 6 months Old rate/2 ? Amount = $70,000 Interest on new bond per 6 months New rate/2 ? Amount = $50,000 Savings per six months $20,000 PV of savings, 30 periods new rate/2 = $418,606 NPV of refunding = PV of savings Cost of refunding = $278,606 Points Received 20 of 20 Comments 3. Question (TCO D) New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14 percentcoupon, 30-year bond issue that was issuedfive years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11. 67 percentin todays market. A call premium of 14percentwould be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYWs marginal tax rate i s 40 percent. The new bonds would be issued when the old bonds are called.What will the after-tax annual interest savings for NYW be if the refunding takes place? (a) $664,050 (b) $699,000 (c) $768,900 (d) $845,790 (e) $930,369 Student Answer (b) $699,000 Old Interest 50,000,000(. 14)(. 60) = 4,200,000 New Interest 50,000,000(. 1167)(. 6) = 3,501,000 Difference is 699,000 Instructor Explanation Answer is b Chapter 20, pp. 810 815 Old interest $50,000,000(0. 14)(0. 6) = $4,200,000 New interest $50,000,000(0. 1167)(0. 6) = (3,501,000) Net annual interest savings $699,000 Points Received 20 of 20 Comments 4. Question (TCO E) Financial Accounting Standards Board (FASB) affirmation 13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the (a) residual value as a fixed asset. (b) residual value as a li index. (c) present value of future lease payments as an asset and also showing this alike( p) amount as an offsetting liability. (d) undiscounted sum of future lease payments as an asset and as an offsetting liability. e) undiscounted sum of future lease payments, less the residual value, as an asset, and as an offsetting liability. Student Answer (c) present value of future lease payments as an asset and also showing this same amount as an offsetting liability. Instructor Explanation Answer is c Chapter 18, pp. 738 740 Points Received 20 of 20 Comments 5. Question (TCO E) In the lease versus buy decision, leasing is often preferable (a) because it has no effect on the firms ability to borrow to make other investments. b) because, generally, no down payment is required, and there are no indirect interest costs. (c) because lease obligations do not presume the firms risk as seen by investors. (d) because the lessee owns the property at the end of the least term. (e) because the lessee may have greater flexibility in abandoning the project in which the hi red property is used than if the lessee bought and owned the asset. Student Answer (c) because lease obligations do not affect the firms risk as seen by investors. Instructor Explanation Answer is e Chapter 18, pp. 740 745 Points Received 0 of 20 Comments