Exam 20: Hybrid Financing: Preferred Stock, leasing, warrants, and Convertibles

Corporations that invest surplus funds in floating-rate preferred stock benefit from getting a relatively stable price,and they also benefit from the 70% tax exemption on preferred dividends received.

FAS 13 requires that for an unqualified audit report,financial (or capital)leases must be included in the balance sheet by reporting the

The next 4 problems must be kept together; all use the data in Exhibit 20.1. ​Exhibit 20.1 -Refer to Exhibit 20.1.What is the bond's straight-debt value at the time of issue?

Atlas Anglers Inc.is considering issuing a 15-year convertible bond that will be priced at its $1,000 par value.The bonds have a 6.5% annual coupon rate,and each bond can be converted into 20 shares of common stock.The stock currently sells at $30 a share,has an expected dividend in the coming year of $3,and has an expected constant growth rate of 5.5%.What is the estimated floor price of the convertible at the end of Year 3 if the required rate of return on a similar straight-debt issue is 9.5%?

Thomson Engineering is issuing new 20-year bonds that have warrants attached.If not for the attached warrants,the bonds would carry an 11% annual interest rate.However,with the warrants attached the bonds will pay an 8% annual coupon.There are 30 warrants attached to each bond,which have a par value of $1,000.What is the value of the straight-debt portion of the bonds?

Leasing is often referred to as off-balance-sheet financing because lease payments are shown as operating expenses on a firm's income statement and,under certain conditions,leased assets and associated liabilities do not appear on the firm's balance sheet.

The problem of dilution of stockholders' earnings never results from the sale of call options,but it can arise if warrants are used.

A lease-versus-purchase analysis should compare the cost of leasing to the cost of owning,assuming that the asset purchased

Which of the following statements is most CORRECT?

Which of the following statements is most CORRECT?

Operating leases help to shift the risk of obsolescence from the user to the lessor.

Leasing is typically a financing decision and not a capital budgeting decision.The decision to acquire the asset is a "done deal" before the lease analysis begins.Therefore,in a lease analysis,we are concerned simply with whether to finance the asset with a lease or with a loan.

Herbert Engineering is issuing new 15-year bonds that have warrants attached.If not for the attached warrants,the bonds would carry a 9% annual interest rate.However,with the warrants attached the bonds will pay a 6% annual coupon.There are 30 warrants attached to each bond,which has a par value of $1,000.What is the value of the straight-debt portion of the bonds?

Sutton Corporation,which has a zero tax rate due to tax loss carry-forwards,is considering a 5-year,$6,000,000 bank loan to finance service equipment.The loan has an interest rate of 10% and would be amortized over 5 years,with 5 end-of-year payments.Sutton can also lease the equipment for 5 end-of-year payments of $1,790,000 each.How much larger or smaller is the bank loan payment than the lease payment? Note: Subtract the loan payment from the lease payment.

The next 4 problems must be kept together; all use the data in Exhibit 20.1. ​Exhibit 20.1 -Refer to Exhibit 20.1.What is the minimum price (or "floor" price)at which the Saunders' bonds should sell?

Most convertible securities are bonds or preferred stocks that,under specified terms and conditions,can be exchanged for common stock at the option of the holder.

Carolina Trucking Company (CTC)is evaluating a potential lease for a truck with a 4-year life that costs $40,000 and falls into the MACRS 3-year class.If the firm borrows and buys the truck,the loan rate would be 9%,and the loan would be amortized over the truck's 4-year life.The loan payments would be made at the end of each year.The truck will be used for 4 years,at the end of which time it will be sold at an estimated residual value of $12,000.If CTC buys the truck,it would purchase a maintenance contract that costs $1,500 per year,payable at the end of each year.The lease terms,which include maintenance,call for a $10,000 lease payment (4 payments total)at the beginning of each year.CTC's tax rate is 35%.What is the net advantage to leasing? (Note: MACRS rates for Years 1 to 4 are 0.33,0.45,0.15,and 0.07.)

Which of the following statements concerning warrants is most CORRECT?

Upstate Water Company just sold a bond with 50 warrants attached.The bonds have a 20-year maturity and an annual coupon of 12%,and they were issued at their $1,000 par value.The current yield on similar straight bonds is 15%.What is the implied value of each warrant?

Moniker Manufacturing's bonds were recently issued at their $1,000 par value.At any time prior to maturity (20 years from now),a bondholder can exchange a bond for a share of common stock at a conversion price of $40.What is the conversion ratio?