Ch14 Exam Questions Long-Term Debt And Leasing - Corporate Finance Asia Pacific 2e Complete Test Bank by Chris Adam. DOCX document preview.
Chapter 14 – Long-term debt and leasing
MULTIPLE CHOICE
1. Quiz Company has a 12-year lease, with payments of $250 000 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. | $416 667 |
b. | $250 000 |
c. | $150 000 |
d. | $100 000 |
REF: 14.4 Leasing NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
Use the following information to answer questions 2 to 4.
Loose Cannon Co. is evaluating a new $75 million bond issue, the proceeds of which would be used to call and retire its outstanding $75 million bonds. Details on both bond issues are presented below. The company is in the 35% tax bracket.
Old bonds: The old issue sold at par, with a coupon rate of 11%. It was issued five years ago with a 20-year maturity. The issue had $350 000 in flotation costs and carries a call price of $1150.
New bonds: The new issue is expected to sell at par with an 8.5% coupon rate and a 15-year maturity. Flotation costs are forecast to be $500 000. Interest payments will overlap for two months while the old bonds are retired.
2. Refer to Loose Cannon Co. What is the initial investment required to refund the bonds?
a. | $11 250 000 |
b. | $8 614 375 |
c. | $7 312 500 |
d. | $3 937 500 |
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
3. Refer to Loose Cannon Co. What are the annual cash flows associated with the new bonds?
a. | $4 143 750 |
b. | $6 375 000 |
c. | $4 132 083 |
d. | $6 357 051 |
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
4. Refer to Loose Cannon Co. What is the NPV of the refunding decision?
a. | $3 654 164 |
b. | $5 356 375 |
c. | $1 224 292 |
d. | $8 614 375 |
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
5. Booyah Company has a callable bond issue, with 55 000 bonds with $1000 par outstanding. If the call price is $1125 per bond and Booyah’s tax rate is 35%, what is the after-tax cost of calling the bonds?
a. | $10 576 925 |
b. | $2 406 250 |
c. | $6 875 000 |
d. | $4 468 750 |
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
6. If a 9%, $100 000 loan has a balance of $83 724 and an annual payment of $13 965, what will the allocation of principal and interest be?
a. | $9000 interest; $4965 principal |
b. | $7535 interest; $6430 principal |
c. | $6430 interest; $7535 principal |
d. | $4965 interest; $9000 principal |
REF: 14.2 Corporate Loans; 14.4 Leasing NAT: Analytic skills
LOC: understand the time value of money
7. Contract terms that specify things a borrower must do are referred to as:
a. | instructive covenants |
b. | informative covenants |
c. | negative covenants |
d. | positive covenants |
REF: 14.1 Characteristics of Long-Term Debt Financing NAT: Reflective thinking
LOC: understand shares and bonds
8. A balloon payment is:
a. | a payment made on circus debt |
b. | a large front-end debt payment, followed by smaller payments |
c. | a large lump-sum payment at maturity of a debt |
d. | a small payment made to charity |
REF: 14.1 Characteristics of Long-Term Debt Financing NAT: Reflective thinking
LOC: understand the time value of money
9. The yield curve’s typical shape suggests:
a. | short-term debt will carry higher interest rates than long-term debt |
b. | short-term debt will carry about the same rates as long-term debt |
c. | short-term debt will carry lower rates than long-term debt |
d. | nothing about the differences in rates due to maturity difference |
REF: 14.1 Characteristics of Long-Term Debt Financing NAT: Reflective thinking
LOC: acquire knowledge of financial markets and interest rates
10. Suppose a company is asked to pledge collateral for a term loan. Which of the following is likely to be least acceptable to the lender?
a. | A rare book collection owned by the company |
b. | The company’s inventory of industrial chemicals |
c. | The company’s real estate holdings |
d. | Securities held by the company for investment |
REF: 14.1 Characteristics of Long-Term Debt Financing NAT: Reflective thinking
LOC: understand shares and bonds
11. How do project finance (PF) loans differ from other syndicated loans?
a. | PF loans are guaranteed by the borrower, while other syndicated loans are not. |
b. | PF loans are issued to special stand-alone companies whose sole purpose is the construction and operation of a single project. |
c. | PF loans are issued in multiple currencies, while most other syndicated loans are issued in a single currency. |
d. | PF loans are issued to any projects that need finance. |
REF: 14.2 Corporate Loans NAT: Reflective thinking
LOC: understand shares and bonds
12. The feature in a bond indenture that requires systematic retirement of the bond issue is:
a. | a planned call requirement |
b. | a sinking fund requirement |
c. | a forced conversion requirement |
d. | a mandated redemption requirement |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
13. A call feature:
a. | allows a bondholder to redeem the bond prior to maturity |
b. | allows a bond issuer to redeem the bond prior to maturity |
c. | allows a bondholder to increase the coupon rate on the bond at specific points in time over the bond’s life |
d. | forces a bond issuer to buy back the bond prior to maturity at the bondholder’s discretion |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
14. All else equal, the higher the call premium:
a. | the smaller the drop in rates necessary for a call to be beneficial |
b. | the larger the drop in rates necessary for a call to be beneficial |
c. | the more likely any rate drop will lead to a call |
d. | the less likely any rate drop will lead to a call |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
15. Wuzzy, Inc. is evaluating the acquisition of a new car for deliveries. Automobile leases are:
a. | typically operating leases |
b. | typically financial (capital) leases |
c. | typically sale-leaseback arrangements |
d. | typically leveraged leases |
REF: 14.4 Leasing NAT: Reflective thinking
LOC: understand shares and bonds
16. Which of the following is an advantage to leasing rather than purchasing?
a. | Leasing effectively allows for the depreciation of land. |
b. | A lease does not have a stated interest cost. |
c. | A lessee generally cannot make improvements to the leased property. |
d. | At the end of the lease, the lessor realises any salvage value of the leased property. |
REF: 14.4 Leasing NAT: Reflective thinking
LOC: understand shares and bonds
17. Specialised equipment that may become obsolete quickly:
a. | may be more attractive to purchase than lease |
b. | may be more attractive to lease than purchase |
c. | cannot easily be evaluated in the lease versus purchase context |
d. | should be deferred until newer equipment is available |
REF: 14.4 Leasing NAT: Reflective thinking
LOC: understand shares and bonds
18. A bond issue with specifically designated bonds maturing each year is:
a. | a mandated redemption issue |
b. | a sinking issue |
c. | a serial issue |
d. | a sequential issue |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
19. Bonds that received investment-grade ratings when first issued but later fell to junk status are known as:
a. | disgraced stars |
b. | shamed debt |
c. | fallen angels |
d. | dead wood |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
20. A contractual clause that requires a borrower to pay taxes and other liabilities when due is an example of:
a. | a positive covenant |
b. | a negative covenant |
c. | a lien |
d. | a term loan |
REF: 14.1 Characteristics of Long-Term Debt Financing NAT: Reflective thinking
LOC: understand shares and bonds
21. An unsecured bond that only creditworthy companies can issue is called:
a. | a mortgage bond |
b. | a collateral trust bond |
c. | a debenture |
d. | a junk bond |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
22. The legal document stating the conditions under which a bond is issued is called the:
a. | indenture |
b. | trustee |
c. | covenant |
d. | call provision |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
23. A bond that grants an investor the right to receive payment in shares rather than in cash is called:
a. | a junk bond |
b. | a zero-coupon bond |
c. | a convertible bond |
d. | a bearer bond |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
24. The user of an asset in a leasing arrangement is called the:
a. | lessor |
b. | lessee |
c. | trustee |
d. | trustor |
REF: 14.4 Leasing NAT: Reflective thinking
LOC: understand shares and bonds
Use the following information to answer questions 25 to 39.
Bavarian Brew is thinking about recalling $30 million of 15-year, $1000 par value bonds that were issued 10 years ago. The bonds carry a coupon rate of 7.8% and have a call price of $1220. Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500 000. Bavarian Brew wants to sell $30 million of five-year, $1000 par value bonds with a 5.8% coupon rate to retire the old bonds. The flotation costs on the new bond issue are estimated to be $525 000. Because it must issue the new bonds before the old bonds can be retired, Bavarian Brew expects a period of three months in which it has to pay interest on the old and the new bonds. Assume a tax rate of 30%.
25. Refer to Bavarian Brew Bond. What is the call premium per bond?
a. | $110 |
b. | $220 |
c. | $90 |
d. | $125 |
1220 – 1000 = 220
PTS: 1 DIF: E
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
26. Refer to Bavarian Brew Bond. What is the after-tax cost of the call premium?
a. | $3 300 000 |
b. | $2 122 000 |
c. | $3 178 000 |
d. | $4 620 000 |
Before tax = 220(30 000) = 6 600 000Taxes = 3 300 000(0.30) = 1 980 000
After-tax cost = 6 600 000 – 1 980 000 = 4 620 000
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
27. How much overlapping interest does Bavarian Brew have to pay on the old bonds after taxes?
a. | $585 000 |
b. | $386 100 |
c. | $409 500 |
d. | $494 500 |
Before = 0.078(3/12)(30 000 000) = 585 000
Taxes = (0.30)585 000 = 175 500
After-tax cost = 585 000 – 175 500 = 409 500
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds
NAT: Analytic skills
LOC: understand shares and bonds
28. Refer to Bavarian Brew Bond. What is the tax reduction caused by the unamortised discount on the old bonds?
a. | $1 500 000 |
b. | $1 000 000 |
c. | $135 000 |
d. | $187 000 |
Discount = 30 000 000 – 28 650 000 = 1 350 000
Tax reduction = 1 350 000(5/15)(0.30) = 135 000
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
29. Refer to Bavarian Brew Bond. What is the tax reduction caused by the unamortised flotation costs?
a. | $500 000 |
b. | $50 000 |
c. | $56 667 |
d. | $256 472 |
500 000(5/15)(0.30) = 50 000
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
30. Refer to Bavarian Brew Bond. What is the initial investment in the new bond issue?
a. | $4 635 767 |
b. | $5 542 433 |
c. | $5 178 000 |
d. | $5 369 500 |
After-tax cost of call premium = 4 620 000
Flotation costs of new bond = 525 000
After-tax cost of overlapping interest = 409 500
Tax savings of unamortised discount on old bonds = 135 000
Tax savings on unamortised flotation costs on old bonds = 50 000
Total investment = 4 620 000 + 525 000 + 409 500 – 135 000 – 50 000 = 5 369 5000
PTS: 1 DIF: H
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
31. Refer to Bavarian Brew Bond. What are the annual after-tax interest payments on the old bond?
a. | $1 544 400 |
b. | $2 340 000 |
c. | $795 600 |
d. | $1 638 000 |
Before tax = (0.078)(30 000 000) = 2 340 000
Taxes = (0.30)(2 340 000) = 702 000
Total = 2 340 000 – 702 000 = 1 638 000
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
32. Refer to Bavarian Brew Bond. What are the annual tax savings from the amortisation of the discount on the old bond?
a. | $1 500 000 |
b. | $30 600 |
c. | $160 000 |
d. | $ 27 000 |
Discount = 30 000 000 – 28 650 000 = 1 350 000
Tax savings = (1 350 000/15)(0.30) = 27 000
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
33. Refer to Bavarian Brew Bond. What are the annual tax savings from the amortisation of the flotation costs on the old bond?
a. | $11 333 |
b. | $10 000 |
c. | $21 999 |
d. | $18 988 |
(500 000/15)(0.30) = 9 999.99 or roughly 10 000
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
34. Refer to Bavarian Brew Bond. What are the annual after-tax savings from paying off the old bonds?
a. | $985 270 |
b. | $1 544 400 |
c. | $ 1 601 000 |
d. | $1 502 467 |
After-tax interest cost = 1 638 000
Tax savings from amortisation of discount = 27 000
Tax savings from amortisation of flotation cost = 10 000
Total savings = 1 638 000 – 27 000 – 10 000 = 1 601 000
PTS: 1 DIF: H
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
35. Refer to Bavarian Brew Bond. What is the annual after-tax interest cost on the new bond?
a. | $1 148 400 |
b. | $1 740 000 |
c. | $1 218 000 |
d. | $967 500 |
Before tax = (0.058)(30 000 000) = 1 740 000
Taxes = (1 740 000)(0.30) = 522 000
After-tax cost = 1 740 000 – 522 000 = 1 218 000
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
36. Refer to Bavarian Brew Bond. What are the annual tax savings from the amortisation of the flotation cost of the new bonds?
a. | $11 900 |
b. | $35 700 |
c. | $23 100 |
d. | $31 500 |
(525 000/5)(0.30) = 31 500
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
37. Refer to Bavarian Brew Bond. What are the annual after-tax debt payments on the new bond?
a. | $1 112 700 |
b. | $1 148 400 |
c. | $1 186 500 |
d. | $1 478 900 |
After-tax interest cost = 1 218 000
Tax savings from amortisation = 31 500
Total cost = 1 218 000 – 31 500 = 1 186 500
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
38. Refer to Bavarian Brew Bond. What are the annual net cash flow savings from issuing the new bonds?
a. | $236 734 |
b. | $478 923 |
c. | $386 367 |
d. | $414 500 |
Savings from retiring old bonds = 1 601 000
Cost of new bonds = 1 186 500
Net savings = 1 601 000 – 1 186 500 = 414 500
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
39. Refer to Bavarian Brew Bond. What is the NPV of the proposed bond refinancing?
a. | $907 484 |
b. | –$907 484 |
c. | –$918 625 |
d. | $895 453 |
After-tax cost of debt = (0.058)(1 – 0.30) = 0.0406
PV of savings:
PMT = 386 367
FV = 0
N = 5
I/Y = 4.06
PV = 1 728 283
NPV = 1 717 142 – 2 635 767 = -918 625
PTS: 1 DIF: H
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
Use the following information to answer questions 40 to 42.
Bavarian Brew wants to lease a new bottling machine. The company obtains a 10-year lease requiring annual payments of $15 000 at the beginning of the year. The company is expected to exercise its option to purchase the machine at the termination of the lease for $10 000 at the end of year 10. The company is in the 35% tax bracket.
40. What is the annual after-tax cash flow for Bavarian Brew from the lease?
a. | $15 000 |
b. | $9750 |
c. | $5250 |
d. | $12 550 |
15 000(1 – 0.35) = 9750
PTS: 1 DIF: E
REF: 14.4 Leasing NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
41. Bavarian Brew has the option to purchase the machine. If the present value of the cash flows associated with the purchase is $78 000, what is the net present value of the lease option? Assume that the company’s cost of debt is 7%.
a. | $8870 |
b. | –$8870 |
c. | $7950 |
d. | –$7950 |
After-tax cost of debt = 0.07(1 – 0.35) = 0.0455
NPV of lease = PV of 10 payments of 9750 at the beginning of the year + PV of purchase price at end of year 10
NPV of lease = 80 461 + 6409 = 86 870
NPV = 86 870 – 78 000 = 8870
PTS: 1 DIF: H
REF: 14.4 Leasing NAT: Analytic skills
LOC: acquire knowledge of capital budgeting and the cost of capital
42. If Bavarian Brew capitalises the lease, what would be the value of the corresponding asset on the company’s balance sheet?
a. | $80 461 |
b. | $76 960 |
c. | $72 580 |
d. | $83 890 |
PV of lease payments = PV of 9750 annually for 10 years = 80 461
PTS: 1 DIF: H
REF: 14.4 Leasing NAT: Analytic skills
LOC: understand shares and bonds
43. You are contemplating leasing a new car. The monthly lease payments (to be made at the end of each month) are $299 for 36 months. At the end of the lease you have the option of purchasing the car for $17 800. If you could buy the car today for $22 500, what is the implicit interest on the lease?
a. | 9.942% |
b. | 0.8285% |
c. | 12.345% |
d. | 7.852% |
PV = 22 500
PMT = 299
N = 36
FV =17 800
I/Y: 0.8285
Annual rate = 0.8285(12) = 9.942
PTS: 1 DIF: H
REF: 14.4 Leasing NAT: Analytic skills
LOC: understand shares and bonds
44. You are contemplating leasing a new car. The monthly lease payments (to be made at the end of each month) are for 36 months. At the end of the lease you have the option of purchasing the car for $17 800. If you could finance the car at 5.9% for the same period and the asking price of the car is $25 800, what is the most that you should pay for a monthly lease?
a. | $331 |
b. | $299 |
c. | $413 |
d. | $199 |
PV = 25 800
N = 36
I/Y = 5.9/12
FV =17 800
PMT = 331
PTS: 1 DIF: H
REF: 14.4 Leasing NAT: Analytic skills
LOC: understand shares and bonds
45. The vast majority of external capital raised by companies each year are/is:
a. | ordinary shares |
b. | preferred shares |
c. | short-term debt |
d. | long-term debt |
REF: Introduction NAT: Reflective thinking
LOC: understand shares and bonds
46. Accountants classify debt as long-term if:
a. | the debt is financing a long-term asset |
b. | the debt matures in more than one year |
c. | the debt matures in more than six months |
d. | it is interest bearing |
REF: 14.1 Characteristics of Long-Term Debt Financing NAT: Reflective thinking
LOC: understand shares and bonds
47. A clause in a borrowing agreement that requires the company to maintain a given debt-to-equity-ratio is:
a. | a negative covenant |
b. | a positive covenant |
c. | an active covenant |
d. | a passive covenant |
REF: 14.1 Characteristics of Long-Term Debt Financing NAT: Reflective thinking
LOC: understand shares and bonds
48. Which of the following is also referred to as asset-backed lending?
a. | Term loans |
b. | Syndicated loans |
c. | Project finance loans |
d. | Personal loans |
REF: 14.2 Corporate Loans NAT: Reflective thinking
LOC: understand shares and bonds
49. Which of the following is typically arranged for infrastructure projects such as bridges and power plants?
a. | Term loans |
b. | Syndicated loans |
c. | Project finance loans |
d. | Personal loans |
REF: 14.2 Corporate Loans NAT: Reflective thinking
LOC: understand shares and bonds
50. If a corporation is looking for a loan that is too large for any one bank to lend, then what type of loan will the company most likely have to take out?
a. | Term loan |
b. | Syndicated loan |
c. | Project finance loan |
d. | Personal loans |
REF: 14.2 Corporate Loans NAT: Reflective thinking
LOC: understand shares and bonds
51. 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. | two times greater than the stated maturity on the bond |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
52. Whose responsibility is it to serve as the watchdog on behalf of the bondholders?
a. | Custodian |
b. | Trustee |
c. | Australian Stock Exchange |
d. | Trustor |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
53. For a typical callable bond, what is the call price for an 8% coupon bond?
a. | $920 |
b. | $1000 |
c. | $1080 |
d. | There is not enough information to answer this question. |
1000 × 1.08 = 1080
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
54. Another term for junk bonds is:
a. | low-risk bonds |
b. | low-yield bonds |
c. | high-yield bonds |
d. | vulture bonds |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
55. 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. | a collateral trust bond |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
56. What is most likely to cause a situation in which 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. | The value of the bond has increased by a significant amount. |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
Use the following information to answer questions 57 and 58.
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.
57. Refer to Speed Racer, Inc. If the bonds were initially sold at 98%, then what is the dollar amount of the unamortised 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 |
0.98 × 100 000 000 = 98 000 000 ===> Total discount = 2 000 000
Amortisation of discount per year = 2 000 000/30 = 66 666.67
10 years of accelerated amortisation = 10 × 66 666.67 = 666 666.67
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
58. 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 amortisation? Assume 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 |
0.98 × 100 000 000 = 98 000 000 ===> Total discount = 2 000 000
Amortisation of discount per year = 2 000 000/30 = 66 666.67
10 years of accelerated amortisation = 10 × 66 666.67 = 666 666.67
Cash flow from acceleration= 666 666.67 × 0.4 = 266 666.67
PTS: 1 DIF: H
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
59. Which type of lease has a term that is generally shorter than the economic life of the asset being leased?
a. | Operating lease |
b. | Capital lease |
c. | Financial lease |
d. | Leveraged lease |
REF: 14.4 Leasing NAT: Reflective thinking
LOC: understand shares and bonds
60. 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. | The bank |
REF: 14.4 Leasing NAT: Reflective thinking
LOC: understand shares and bonds
61. 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. | Sale–leaseback arrangement |
b. | Capital lease |
c. | Operating lease |
d. | Lease of convenience |
5.5 × 0.75 = 4.125 years < 5 years ===> Capital lease
PTS: 1 DIF: M
REF: 14.4 Leasing NAT: Reflective thinking
LOC: understand shares and bonds
62. What is the present value of an operating lease that involves payments of $5000 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 company is in the 40% marginal tax rate and the pretax cost of debt for the company is 8%.
a. | $38 986.43 |
b. | $23 391.86 |
c. | $20 130.24 |
d. | $18 000.00 |
After-tax cost of payment = 5000 × (1 – 0.4) = 3000
After-tax cost of debt: 0.08 × (1 – 0.4) = 0.048
PV = 3000 × PVIFA(10,4.8%) = 3000 × 7.7972858 = 23 391.86
PTS: 1 DIF: M
REF: 14.4 Leasing NAT: Analytic skills
LOC: understand shares and bonds
63. What is the present value of an operating lease that involves payments of $8000 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 company is in the 35% marginal tax rate and the pretax cost of debt for the company is 12%.
a. | $60 918.39 |
b. | $49 554.99 |
c. | $39 596.96 |
d. | $32 210.75 |
After-tax cost of payment = 8000 × (1 – 0.35) = 5200
After-tax cost of debt = 0.12 × (1 – 0.35) = 0.078
PV = 5200 × PVIFA(12,7.8%) = 5200 × 7.6147993 = 39 596.96
PTS: 1 DIF: M
REF: 14.4 Leasing NAT: Analytic skills
LOC: understand shares and bonds
64. What is the accounting capitalised value of an operating lease that involves payments of $8000 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 company is in the 35% marginal tax rate and the pretax cost of debt for the company is 12%.
a. | $96 000.00 |
b. | $49 554.99 |
c. | $39 596.96 |
d. | $32 210.75 |
PV = 8000 × PVIFA(12,12%) = 8000 × 6.1943742 = 49 554.99
PTS: 1 DIF: M
REF: 14.4 Leasing NAT: Analytic skills
LOC: understand shares and bonds
65. 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 exist. |
d. | Constraints associated with consolidation, merging or combining with another company exist. |
REF: 14.1 Characteristics of Long-Term Debt Financing NAT: Reflective thinking
LOC: understand shares and bonds
66. A loan made by an institution to a business with an initial maturity of more than 1 year, generally 5–12 years, is known as:
a. | a Eurocurrency loan |
b. | a Treasury bill |
c. | a syndicated loan |
d. | a term loan |
e. | a share purchase warrant |
REF: 14.2 Corporate Loans NAT: Reflective thinking
LOC: understand shares and bonds
67. An instrument that gives the holder the right to purchase a certain number of shares of a company’s ordinary share at a specified price over a certain period is known as:
a. | a Eurocurrency loan |
b. | a Treasury bill |
c. | a syndicated loan |
d. | a term loan |
e. | a share purchase warrant |
REF: 14.2 Corporate Loans NAT: Reflective thinking
LOC: understand shares and bonds
68. A floating-rate, hard-currency loan made by a large number of international banks to international corporate and government borrows is known as:
a. | a Eurocurrency loan |
b. | a Treasury bill |
c. | a syndicated loan |
d. | a term loan |
e. | a share purchase warrant |
REF: 14.2 Corporate Loans NAT: Reflective thinking
LOC: understand shares and bonds
69. Which of the following qualifies as a Eurobond?
a. | A dollar-denominated bond issued by a US corporation and sold to Western European investors |
b. | A dollar-denominated bond issued by a US corporation and sold to US investors |
c. | A euro-denominated bond issued by a German corporation and sold to US investors |
d. | A euro-denominated bond issued by a German corporation and sold to European investors |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
70. Which of the following qualifies as a foreign bond?
a. | A Swiss franc-denominated bond issued in Switzerland by a US corporation |
b. | A dollar-denominated bond issued by a US corporation and sold to non-US investors |
c. | A euro-denominated bond issued by a German corporation and sold to US investors who live in Germany |
d. | A euro-denominated bond issued by a German corporation and sold to European investors |
REF: 14.3 Corporate Bonds NAT: Reflective thinking
LOC: understand shares and bonds
71. 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. | a sale-leaseback arrangement |
c. | a leverage lease |
d. | an indirect lease |
REF: 14.4 Leasing NAT: Reflective thinking
LOC: understand shares and bonds
72. When one company 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. | a sale-leaseback arrangement |
c. | a leveraged lease |
d. | an indirect lease |
REF: 14.4 Leasing NAT: Reflective thinking
LOC: understand shares and bonds
73. 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 |
REF: 14.4 Leasing NAT: Analytic skills
LOC: acquire knowledge of financial analysis and cash flows
74. For a typical callable bond, what is the call price for a 10% coupon bond?
a. | $900 |
b. | $1000 |
c. | $1100 |
d. | There is not enough information to answer this question. |
1000 × 1.10 = 1100
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
75. Emma International 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 unamortised discount that would be accelerated at retirement?
a. | $3 000 000 |
b. | $150 000 |
c. | $4 500 000 |
d. | $4 650 000 |
$150 000 000 | Retiring debt | ||
10 | Years ago | ||
30 | Original term | ||
97 | Price | ||
$4 500 000 | Total discount | ||
$150 000.00 | Amortisation of discount | ||
20 | Acceleration time | ||
$3 000 000.00 | Accelerated discount | ||
PTS: 1 DIF: M
REF: 14.3 Corporate Bonds NAT: Analytic skills
LOC: understand shares and bonds
76. 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 company is in the 35% marginal tax rate and the pretax cost of debt for the company is 9%.
a. | $73 179.04 |
b. | $93 433.80 |
c. | $60 731.97 |
d. | $112 583.13 |
Payment | $12 000 | |
Term | 14 | |
Tax | 35% | |
After-tax payment | $7800 | |
Interest | 9% | |
After-tax debt | 5.850% | |
PV | $73 179.04 | |
PTS: 1 DIF: M
REF: 14.4 Leasing NAT: Analytic skills
LOC: understand shares and bonds
SHORT ANSWER
1. What is a debenture?
PTS: 1 DIF: E
REF: 14.2 Corporate Loans
2. What is a balloon payment?
PTS: 1 DIF: E
REF: 14.2 Corporate Loans
3. What are the basic types of leases?
PTS: 1 DIF: E
REF: 14.4 Leasing
4. Explain syndicated loans.
PTS: 1 DIF: E
REF: 14.2 Corporate Loans
5. What is a sinking fund?
PTS: 1 DIF: E
REF: 14.3 Corporate Bonds
6. What is a financial lease?
PTS: 1 DIF: E
REF: 14.4 Leasing