homework

| October 29, 2015

Directions: Answer the following ten questions on a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both.

QUESTION 1
Which of the following is generally NOT true and an advantage of going public?
a. Increases the liquidity of the firm’s stock.
b. Makes it easier to obtain new equity capital.
c. Establishes a market value for the firm.
d. Makes it easier for owner-managers to engage in profitable self-dealings.
e. Facilitates stockholder diversification.

QUESTION 2
Which of the following statements about listing on a stock exchange is most CORRECT?
a. Any firm can be listed on the NYSE as long as it pays the listing fee.
b. Listing provides a company with some “free” advertising, and it may enhance the firm’s prestige and help it do more business.
c. Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC.
d. The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE.
e. Listing is a decision of more significance to a firm than going public.

QUESTION 3
Which of the following statements is most CORRECT?
a. Private placements occur most frequently with stocks, but bonds can also be sold in a private placement.
b. Private placements are convenient for issuers, but the convenience is offset by higher flotation costs.
c. The SEC requires that all private placements be handled by a registered investment banker.
d. Private placements can generally bring in funds faster than is the case with public offerings.
e. In a private placement, securities are sold to private (individual) investors rather than to institutions

QUESTION 4
Which of the following statements is most CORRECT?
a. The key benefits associated with refunding debt are the reduction in the firm’s debt ratio and the creation of more reserve borrowing capacity.
b. The mechanics of finding the NPV of a refunding decision are fairly straightforward. However, the decision of when to refund is not always clear because it requires a forecast of future interest rates.
c. If a firm with a positive NPV refunding project delays refunding and interest rates rise, the firm can still obtain the entire NPV by locking in a low coupon rate when the rates are low, even though it actually refunds the debt after rates have risen.
d. Suppose a firm is considering refunding and interest rates rise during time when the analysis is being done. The rise in rates would tend to lower the expected price of the new bonds, which would make them cheaper to the firm and thus increase the expected interest savings.
e. If new debt is used to refund old debt, the correct discount rate to use in the refunding analysis is the before-tax cost of new debt.

QUESTION 5
Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?
a. A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates.
b. The flotation costs associated with issuing new bonds rise.
c. The firm’s CFO believes that interest rates are likely to decline in the future.
d. The firm’s CFO believes that corporate tax rates are likely to be increased in the future.
e. The yield to maturity on the company’s outstanding bonds increases due to a weakening of the firm’s financial situation.

QUESTION 6
Operating leases often have terms that include
a. full amortization over the life of the lease.
b. very high penalties if the lease is canceled.
c. restrictions on how much the leased property can be used.
d. much longer lease periods than for most financial leases.
e. maintenance of the equipment by the lessor.

QUESTION 7
Which of the following statements is most CORRECT?
a. Capitalizing a lease means that the firm issues equity capital in proportion to its current
capital structure, in an amount sufficient to support the lease payment obligation.
b. The fixed charges associated with a lease can be as high as, but never greater than, the
fixed payments associated with a loan.
c. Capital, or financial, leases generally provide for maintenance by the lessor.
d. A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.
e. Firms that use “off balance sheet” financing, such as leasing, would show lower debt ratios if the effects of their leases were reflected in their financial statements.

QUESTION 8
Financial Accounting Standards Board (FASB) Statement #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 liability.
b. present value of future lease payments as an asset and also showing this same amount as an offsetting liability.
c. undiscounted sum of future lease payments as an asset and as an offsetting liability.
d. undiscounted sum of future lease payments, less the residual value, as an asset and as an offsetting liability.
e. residual value as a fixed asset.

QUESTION 9
Heavy use of off-balance sheet lease financing will tend to
a. make a company appear less risky than it actually is because its stated debt ratio will appear lower.
b. affect a company’s cash flows but not its degree of risk.
c. have no effect on either cash flows or risk because the cash flows are already reflected in the income statement.
d. affect the lessee’s cash flows but only due to tax effects.
e. make a company appear more risky than it actually is because its stated debt ratio will be
increased.

QUESTION 10
In the lease versus buy decision, leasing is often preferable
a. because, generally, no down payment is required, and there are no indirect interest costs.
b. because lease obligations do not affect the firm’s risk as seen by investors.
c. because the lessee owns the property at the end of the least term.
d. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.
e. because it has no effect on the firm’s ability to borrow to make other investments

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