Question 1

Which of the following is generally NOT true and an advantage of going public?

Accepted Answer

A)  Facilitates stockholder diversification. 
B)  Increases the liquidity of the firm's stock. 
C)  Makes it easier to obtain new equity capital. 
D)  Establishes a market value for the firm. 
E)  Makes it easier for owner-managers to engage in profitable self-dealings. 
A)  Facilitates stockholder diversification. 
B)  Increases the liquidity of the firm's stock. 
C)  Makes it easier to obtain new equity capital. 
D)  Establishes a market value for the firm. 
E)  Makes it easier for owner-managers to engage in profitable self-dealings. E

Question 2

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 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% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.
-The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What will the net increase or decrease in the annual flotation cost tax savings be if refunding takes place?

Accepted Answer

A)  $6,480 
B)  $7,200 
C)  $8,000 
D)  $8,800 
E)  $9,680 
A)  $6,480 
B)  $7,200 
C)  $8,000 
D)  $8,800 
E)  $9,680 C

Question 3

Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?

Accepted Answer

A)  The yield to maturity on the company's outstanding bonds increases due to a weakening of the firm's financial situation. 
B)  A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates. 
C)  The flotation costs associated with issuing new bonds rise. 
D)  The firm's CFO believes that interest rates are likely to decline in the future. 
E)  The firm's CFO believes that corporate tax rates are likely to be increased in the future. 
A)  The yield to maturity on the company's outstanding bonds increases due to a weakening of the firm's financial situation. 
B)  A provision in the bond indenture lowers the call price on specific dates, and yesterday was one of those dates. 
C)  The flotation costs associated with issuing new bonds rise. 
D)  The firm's CFO believes that interest rates are likely to decline in the future. 
E)  The firm's CFO believes that corporate tax rates are likely to be increased in the future. B

Question 4

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 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% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.
-What is the NPV if NYW refunds its bonds today?

Accepted Answer

A)  $1,746,987 
B)  $1,838,933 
C)  $1,935,719 
D)  $2,037,599 
E)  $2,241,359 
A)  $1,746,987 
B)  $1,838,933 
C)  $1,935,719 
D)  $2,037,599 
E)  $2,241,359

Question 5

The appropriate discount rate to use when analyzing a refunding decision is the after-tax cost of new debt, in part because there is relatively little risk of not realizing the interest savings.

Accepted Answer

A) True 
 B)False

Question 6

Thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding bond. Ignore tax considerations--assume that the firm's tax rate is zero. The company's decision of whether to call the bonds depends critically on the current interest rate on newly issued bonds. What is the breakeven interest rate, the rate below which it would be profitable to call in the bonds?

Accepted Answer

A)  9.57% 
B)  10.07% 
C)  10.60% 
D)  11.16% 
E)  11.72% 
A)  9.57% 
B)  10.07% 
C)  10.60% 
D)  11.16% 
E)  11.72%

Question 7

Which of the following statements concerning common stock and the investment banking process is NOT CORRECT?

Accepted Answer

A)  The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue. 
B)  If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market. 
C)  Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and reputation probably outweigh the additional costs to the firm. 
D)  Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer. 
E)  The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue. 
A)  The preemptive right gives each existing common stockholder the right to purchase his or her proportionate share of a new stock issue. 
B)  If a firm sells 1,000,000 new shares of Class B stock, the transaction occurs in the primary market. 
C)  Listing a large firm's stock is often considered to be beneficial to stockholders because the increases in liquidity and reputation probably outweigh the additional costs to the firm. 
D)  Stockholders have the right to elect the firm's directors, who in turn select the officers who manage the business. If stockholders are dissatisfied with management's performance, an outside group may ask the stockholders to vote for it in an effort to take control of the business. This action is called a tender offer. 
E)  The announcement of a large issue of new stock could cause the stock price to fall. This loss is called "market pressure," and it is treated as a flotation cost because it is a cost to stockholders that is associated with the new issue.

Question 8

The term "leaving money on the table" refers to the situation where an investment banking house makes a very low bid for the right to underwrite a firm's new stock offering. The banker is, in effect, "buying the job" with the low bid and thus not getting all the money his firm would normally earn on the job.

Accepted Answer

A) True 
 B)False

Question 9

Which of the following statements is most CORRECT?

Accepted Answer

A)  In a private placement, securities are sold to private (individual) investors rather than to institutions. 
B)  Private placements occur most frequently with stocks, but bonds can also be sold in a private placement. 
C)  Private placements are convenient for issuers, but the convenience is offset by higher flotation costs. 
D)  The SEC requires that all private placements be handled by a registered investment banker. 
E)  Private placements can generally bring in funds faster than is the case with public offerings. 
A)  In a private placement, securities are sold to private (individual) investors rather than to institutions. 
B)  Private placements occur most frequently with stocks, but bonds can also be sold in a private placement. 
C)  Private placements are convenient for issuers, but the convenience is offset by higher flotation costs. 
D)  The SEC requires that all private placements be handled by a registered investment banker. 
E)  Private placements can generally bring in funds faster than is the case with public offerings.

Question 10

Which of the following statements about listing on a stock exchange is most CORRECT?

Accepted Answer

A)  Listing is a decision of more significance to a firm than going public. 
B)  Any firm can be listed on the NYSE as long as it pays the listing fee. 
C)  Listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business. 
D)  Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC. 
E)  The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE. 
A)  Listing is a decision of more significance to a firm than going public. 
B)  Any firm can be listed on the NYSE as long as it pays the listing fee. 
C)  Listing provides a company with some "free" advertising, and it may enhance the firm's prestige and help it do more business. 
D)  Listing reduces the reporting requirements for firms, because listed firms file reports with the exchange rather than with the SEC. 
E)  The OTC is the second largest market for listed stock, and it is exceeded only by the NYSE.

Question 11

Suppose a company issued 30-year bonds 4 years ago, when the yield curve was inverted. Since then long-term rates (10 years or longer) have remained constant, but the yield curve has resumed its normal upward slope. Under such conditions, a bond refunding would almost certainly be profitable.

Accepted Answer

A) True 
 B)False

Question 12

The State of Idaho issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt bonds 5 years ago. The bonds had 5 years of call protection, but now the state can call the bonds if it chooses to do so. The call premium would be 5% of the face amount. Today 15-year, 5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%. What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are not relevant.

Accepted Answer

A)  $278,606 
B)  $292,536 
C)  $307,163 
D)  $322,521 
E)  $338,647 
A)  $278,606 
B)  $292,536 
C)  $307,163 
D)  $322,521 
E)  $338,647

Question 13

Whereas commercial banks take deposits from some customers and make loans to other customers, the principal activities of investment banks are (1) to help firms issue new stock and bonds and (2) to give firms advice with regard to mergers and other financial matters. However, financial corporations often own and operate subsidiaries that operate as commercial banks and others that are investment banks. This was not true some years ago, when the two types of banks were required by law to be completely independent of one another.

Accepted Answer

A) True 
 B)False

Question 14

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 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% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.
-What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?

Accepted Answer

A)  $5,049,939 
B)  $5,315,725 
C)  $5,595,500 
D)  $5,890,000 
E)  $6,200,000 
A)  $5,049,939 
B)  $5,315,725 
C)  $5,595,500 
D)  $5,890,000 
E)  $6,200,000

Question 15

The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price. Since this dilutes the value of the public stockholders, it "carves out" some of their value.

Accepted Answer

A) True 
 B)False

Question 16

Which of the following statements is NOT CORRECT?

Accepted Answer

A)  When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held." 
B)  "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. 
C)  Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. 
D)  When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. 
E)  It is possible for a firm to go public and yet not raise any additional new capital. 
A)  When a corporation's shares are owned by a few individuals who own most of the stock or are part of the firm's management, we say that the firm is "closely, or privately, held." 
B)  "Going public" establishes a firm's true intrinsic value and ensures that a liquid market will always exist for the firm's shares. 
C)  Publicly owned companies have sold shares to investors who are not associated with management, and they must register with and report to a regulatory agency such as the SEC. 
D)  When stock in a closely held corporation is offered to the public for the first time, the transaction is called "going public," and the market for such stock is called the new issue market. 
E)  It is possible for a firm to go public and yet not raise any additional new capital.

Question 17

The City of Charleston issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax-exempt muni bonds 10 years ago. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant.

Accepted Answer

A)  $453,443 
B)  $476,115 
C)  $499,921 
D)  $524,917 
E)  $551,163 
A)  $453,443 
B)  $476,115 
C)  $499,921 
D)  $524,917 
E)  $551,163

Question 18

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 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% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. 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?

Accepted Answer

A)  $664,050 
B)  $699,000 
C)  $768,900 
D)  $845,790 
E)  $930,369 
A)  $664,050 
B)  $699,000 
C)  $768,900 
D)  $845,790 
E)  $930,369

Question 19

If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision, and if the NPV of refunding is positive, then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following statements is most CORRECT?

Accepted Answer

A)  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. 
B)  The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity. 
C)  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. 
D)  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. 
E)  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. 
A)  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. 
B)  The key benefits associated with refunding debt are the reduction in the firm's debt ratio and the creation of more reserve borrowing capacity. 
C)  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. 
D)  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. 
E)  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.

Which of the following is generally NOT true and an advantage of going public?

Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?

The appropriate discount rate to use when analyzing a refunding decision is the after-tax cost of new debt, in part because there is relatively little risk of not realizing the interest savings.

Which of the following statements concerning common stock and the investment banking process is NOT CORRECT?

Which of the following statements is most CORRECT?

Which of the following statements about listing on a stock exchange is most CORRECT?

Suppose a company issued 30-year bonds 4 years ago, when the yield curve was inverted. Since then long-term rates (10 years or longer) have remained constant, but the yield curve has resumed its normal upward slope. Under such conditions, a bond refunding would almost certainly be profitable.

The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price. Since this dilutes the value of the public stockholders, it "carves out" some of their value.

Which of the following statements is NOT CORRECT?

If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision, and if the NPV of refunding is positive, then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.

Which of the following statements is most CORRECT?

An Overview of Financial Management

Risk and Return: Part I

Risk and Return: Part II

Bond Valuation

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Corporate Valuation and Value-Based Management

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Capital Structure Decisions: Part II

Distributions to Shareholders

Lease Financing

Hybrid Financing

Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

Filters

Exam 18: Ipos, Investment Banking, and Financial Restructuring

Which of the following is generally NOT true and an advantage of going public?

Which of the following factors would increase the likelihood that a company would call its outstanding bonds at this time?

The appropriate discount rate to use when analyzing a refunding decision is the after-tax cost of new debt, in part because there is relatively little risk of not realizing the interest savings.

Which of the following statements concerning common stock and the investment banking process is NOT CORRECT?

Which of the following statements is most CORRECT?

Which of the following statements about listing on a stock exchange is most CORRECT?

Suppose a company issued 30-year bonds 4 years ago, when the yield curve was inverted. Since then long-term rates (10 years or longer) have remained constant, but the yield curve has resumed its normal upward slope. Under such conditions, a bond refunding would almost certainly be profitable.

The term "equity carve-out" refers to the situation where a firm's managers give themselves the right to purchase new stock at a price far below the going market price. Since this dilutes the value of the public stockholders, it "carves out" some of their value.

Which of the following statements is NOT CORRECT?

If the firm uses the after-tax cost of new debt as the discount rate when analyzing a refunding decision, and if the NPV of refunding is positive, then the value of the firm will be maximized if it immediately calls the outstanding debt and replaces it with an issue that has a lower coupon rate.

Which of the following statements is most CORRECT?

An Overview of Financial Management

Risk and Return: Part I

Risk and Return: Part II

Bond Valuation

Basic Stock Valuation

Financial Options

Accounting for Financial Management

Analysis of Financial Statements

Financial Planning and Forecasting Financial Statements

Determining the Cost of Capital

Corporate Valuation and Value-Based Management

Capital Budgeting: Decision Criteria

Capital Budgeting: Cash Flows and Risk

Real Options

Capital Structure Decisions: Part I

Capital Structure Decisions: Part II

Distributions to Shareholders

Lease Financing

Hybrid Financing

Working Capital Management

Providing and Obtaining Credit

Other Topics in Working Capital Management

Derivatives and Risk Management

Bankruptcy, Reorganization, and Liquidation

Mergers, Lbos, Divestitures, and Holding Companies

Multinational Financial Management

Filters