60. If a bond issue has a sinking fund provision then
a.
the corporation makes payments, based upon a preconceived schedule, to a trustee who
uses these funds to retire bonds by purchasing them in the marketplace.
b.
the indenture allows the value of the bonds to fall to a pre-identified price before default
occurs.
c.
a certain portion of the interest payments on the bond are used to retire bonds by
purchasing them in the marketplace.
d.
none of the above.
61. If a bond has a sinking fund provision then the actual maturity of the bond will probably be
a.
greater than the stated maturity on the bond.
b.
exactly equal to the state maturity on the bond.
c.
less than the stated maturity on the bond.
d.
none of the above.
62. Whose responsibility is it to serve as the “watchdog” on behalf of the bondholders?
a.
custodian
b.
trustee
c.
wall street
d.
none of the above
63. For a typical callable bond, what is the call price for 8% coupon bond?
a.
$920
b.
$1,000
c.
$1,080
d.
there is not enough information to determine
64. Another term for junk bonds is
a.
low-risk bonds
b.
low-yield bonds
c.
high-yield bonds
d.
vulture bonds
65. A bond issued by an international borrower and sold to investors in countries with currencies other
than the currency in which the bond is denominated is called
a.
a Eurobond
b.
an Alien bond
c.
a Cross-currency bond
d.
none of the above
66. What is most likely to cause a situation where a callable bond will be called by the issuer?
a.
the value of the bond has dropped by a significant amount
b.
the yield on the bond has increased by a significant amount
c.
the yield on the bond has decreased by a significant amount
d.
any of the above
NARRBEGIN: Speed Racer, Inc.
Speed Racer, Inc.
Speed Racer, Inc. is thinking about retiring a $100,000,000 issue of bonds that it sold to the public 20
years ago. The original maturity date for the bonds was 30 years.
NARREND
67. Refer to Speed Racer, Inc. If the bonds were initially sold at 98, then what is the dollar amount of the
unamortized discount that would be accelerated at retirement?
a.
$66,666.67
b.
$666,666.67
c.
$2,000,000.00
d.
$3,266,666.67
68. Refer to Speed Racer, Inc. If the bonds were initially sold at 98, then what is the after-tax cash flow
effect, today, of the accelerated amortization if Speed Racer is in the 40% marginal tax bracket?
a.
$26,666.67
b.
$266,666.67
c.
$800,000.00
d.
$1,306,666.67
69. What are the basic type of leases available to businesses?
a.
operating leases
b.
financial leases
c.
capital leases
d.
all of the above
70. Which type of lease has a term which is generally shorter than the economic life of the asset being
leased?
a.
operating lease
b.
capital lease
c.
financial lease
d.
leveraged lease
71. In an operating lease, which party is typically responsible for maintenance costs on the asset?
a.
the lessor
b.
the lessee
c.
the third party financing the asset
d.
all of the above
72. You are interested in leasing an automobile for your company. You find that the lessor is offering you
a 5-year lease on a car when the economic life on this car is considered to be 5.5 years. What type of
lease must this be classified as if you agree to the terms?
a.
lease and saleback
b.
capital lease
c.
operating lease
d.
lease of convenience
73. What is the present value of an operating lease that involves payments of $5,000 per year (the end of
the year) for 10 years with no possibility of purchase at the end of the lease term. Assume that the firm
is in the 40% marginal tax rate and the pre-tax cost of debt for the firm is 8%?
a.
$38,986.43
b.
$23,391.86
c.
$20,130.24
d.
$18,000.00
74. What is the present value of an operating lease that involves payments of $8,000 per year (at the end of
each year) for 12 years with no possibility of purchase at the end of the lease term. Assume that the
firm is in the 35% marginal tax rate and the pre-tax cost of debt for the firm is 12%?
a.
$60,918.39
b.
$49,554.99
c.
$39,596.96
d.
$32,210.75
75. What is the accounting capitalized value of an operating lease that involves payments of $8,000 per
year (at the end of each year) for 12 years with no possibility of purchase at the end of the lease term.
Assume that the firm is in the 35% marginal tax rate and the pre-tax cost of debt for the firm is 12%?
a.
$96,000.00
b.
$49,554.99
c.
$39,596.96
d.
$32,210.75
76. If a borrower violates a covenant the lender may:
a.
demand immediate repayment
b.
waive the violation and continue the loan
c.
waive the violation but alter the terms of the original debt agreement
d.
any of the above are possible
77. Which of the following is not an example of a negative covenant?
a.
Borrowers may not sell accounts receivable to generate cash.
b.
The borrower is required to maintain a minimum level of net working capital.
c.
Constraints associated with fixed assets regarding the liquidation, acquisition and
encumbrance.
d.
Constraints associated with consolidation, merging or combining with another firm.
e.
All of the above are examples of negative covenants.
78. With respect to the size of a loan:
a.
the larger the loan the better the economies of scale with respect to loan administration
costs per dollar borrowed.
b.
the greater the risk to the lender because larger loans result in less diversification.
c.
there is a risk trade-off associated with net administrative costs.
d.
all of the above
e.
(a) and (b) only
79. Which of the following statements is true?
a.
U.S. Treasury securities with relevant maturities are used as the basic cost of money and
lenders add premiums for risk and other factors.
b.
Some lenders determine a prospective borrower’s risk class and determine the rates
charged on loans with similar maturities by firms in the same risk class.
c.
All borrowers are charge the same rate regardless of their risk class.
d.
Both (a) and (b) are true
e.
None of the above statements are true.
80. A loan made by an institution to a business with an initial maturity of more than 1 year, generally 5 to
12 years, is known as a(n):
a.
Eurocurrency loan
b.
Treasury bill
c.
syndicated loan
d.
term loan
e.
stock purchase warrant
81. Term loans:
a.
are essentially private placements of debt, bypassing an investment banker as an
intermediary.
b.
are more flexible than publicly-traded debt
c.
are often made to finance permanent working capital needs
d.
all of the above
e.
(a) and (b) only
82. An instrument that gives the holder the right to purchase a certain number of shares of a firm’s
common stock at a specified price over a certain period is known as a(n):
a.
Eurocurrency loan
b.
Treasury bill
c.
syndicated loan
d.
term loan
e.
stock purchase warrant
83. A floating-rate, hard-currency loan made by a large number of international banks to international
corporate and government borrows is known as:
a.
Eurocurrency loan
b.
Treasury bill
c.
syndicated loan
d.
term loan
e.
stock purchase warrant
84. The protection of bond collateral
a.
is crucial to increasing the safety of the bond issue.
b.
helps enhance the marketability of the bond issue.
c.
does not usually occur in a bond issue.
d.
both (a) and (b)
85. Which of the following has (have) transformed U.S. bond-issuance patterns?
a.
shelf registration
b.
Rule 42
c.
Section 12-b
d.
Rule 144A
e.
both (a) and (d)
86. Which of the following qualifies as a Eurobond?
a.
A dollar-denominated bond issued by a U.S. corporation and sold to Western European
investors.
b.
A dollar-denominated bond issued by a U.S. corporation and sold to U.S. investors.
c.
A Euro-denominated bond issued by a German corporation and sold to U.S. investors.
d.
A Euro-denominated bond issued by a German corporation and sold to European
investors.
87. Which of the following qualifies as a foreign bond?
a.
A Swiss franc-denominated bond issued in Switzerland by a U.S. corporation.
b.
A dollar-denominated bond issued by a U.S. corporation and sold to non-U.S. investors.
c.
A Euro-denominated bond issued by a German corporation and sold to U.S. investors who
live in Germany.
d.
A Euro-denominated bond issued by a German corporation and sold to European
investors.
88. A lease that results when a lessor acquires the assets that are leased to a given lessee is known as a:
a.
direct lease
b.
sale-leaseback arrangement
c.
leverage lease
d.
none of the above
89. When one firm sells an asset to another for cash and then leases the asset from its new owner, it is
known as a:
a.
direct lease
b.
sale-leaseback arrangement
c.
leveraged lease
d.
none of the above
90. Emma International has a lease with payments of $500,000 made at the beginning of each year. If no
purchase option exists, and the company is in the 40% tax bracket, what is the annual after-tax cash
outflow on the lease?
a.
$500,000
b.
$100,000
c.
$200,000
d.
$300,000
91. Roxy International has a lease with payments of $750,000 made at the beginning of each year. If no
purchase option exists, and the company is in the 40% tax bracket, what is the annual after-tax cash
outflow on the lease?
a.
$300,000
b.
$500,000
c.
$100,000
d.
$200,000
92. Louis International has a lease with payments of $750,000 made at the beginning of each year. If no
purchase option exists, and the company is in the 40% tax bracket, what is the annual after-tax cash
outflow on the lease?
a.
$ 60,000
b.
$130,000
c.
$ 70,000
d.
$200,000
93. For a typical callable bond, what is the call price for 10% coupon bond?
a.
$900
b.
$1,000
c.
$1,100
d.
there is not enough information to determine
94. For a typical callable bond, what is the call price for 12% coupon bond?
a.
$880
b.
$1,000
c.
$1,120
d.
there is not enough information to determine
95. Emma Internationa is considering retiring a $150 million bond issue sold to the public 10 years ago.
The original maturity was 30 years. If the bonds were initially sold at 97, then what is the dollar
amount of the unamortized discount that would be accelerated at retirement?
a.
$3,000,000
b.
$150,000
c.
$4,500,000
d.
$4,650,000
96. Louis Internationa is considering retiring a $180 million bond issue sold to the public 15 years ago.
The original maturity was 25 years. If the bonds were initially sold at 97, then what is the dollar
amount of the unamortized discount that would be accelerated at retirement?
a.
$ 216,000
b.
$2,160,000
c.
$5,400,000
d.
$5,616,000
97. Roxy Internationa is considering retiring a $280 million bond issue sold to the public 15 years ago.
The original maturity was 25 years. If the bonds were initially sold at 98, then what is the dollar
amount of the unamortized discount that would be accelerated at retirement?
a.
$5,824,000
b.
$5,600,000
c.
$ 224,000
d.
$2,240,000
98. Emma Internationa is considering retiring a $150 million bond issue sold to the public 10 years ago.
The original maturity was 30 years. If the bonds were initially sold at 97, then what is the dollar
amount of the unamortized discount that would be accelerated at retirement?
a.
$3,000,000
b.
$ 150,000
c.
$4,500,000
d.
$4,650,000
99. Louis Internationa is considering retiring a $180 million bond issue sold to the public 15 years ago.
The original maturity was 25 years. If the bonds were initially sold at 97, then what is the after-tax
cash flow effect, today, of the accelerated amortization if Louis is in the 35% marginal tax bracket
a.
$ 756,000
b.
$ 75,600
c.
$1,890,000
d.
$ 216,000
100. Roxy Internationa is considering retiring a $280 million bond issue sold to the public 15 years ago.
The original maturity was 25 years. If the bonds were initially sold at 98, then what is the after-tax
cash flow effect, today, of the accelerated amortization if Roxy is in the 35% marginal tax bracket?
a.
$224,000
b.
$1,960,000
c.
$784,000
d.
$78,400
101. What is the present value of an operating lease that involves payments of $12,000 per year (the end of
the year) for 14 years with no possibility of purchase at the end of the lease term. Assume that the
firm is in the 35% marginal tax rate and the pre-tax cost of debt for the firm is 9%?
a.
$73,179.04
b.
$93,433.80
c.
$60,731.97
d.
$112,583.13
102. What is the present value of an operating lease that involves payments of $8,000 per year (the end of
the year) for 5 years with no possibility of purchase at the end of the lease term. Assume that the firm
is in the 35% marginal tax rate and the pre-tax cost of debt for the firm is 7%?
a.
$32,801.58
b.
$22,796.11
c.
$21,321.03
d.
$35,070.93
103. What is the present value of an operating lease that involves payments of $25,000 per year (the end of
the year) for 10 years with no possibility of purchase at the end of the lease term. Assume that the
firm is in the 40% marginal tax rate and the pre-tax cost of debt for the firm is 10%?
a.
$184,002.18
b.
$92,168.51
c.
$110,401.31
d.
$153,614.18