Regarding the use of bonds or preferred stock for raising equity, which of the following statements is true regarding the potential of triggeringbankruptcy?Oa. Non-payment of bond interest can trigger a company into bankruptcy.Ob. Non-payment of preferred dividends can trigger a company into bankruptcy.c. Bankruptcy cannot be triggered until there is non-payment of both bond interest and preferred dividends.d. Bankruptcy cannot be triggered by either non-payment of bond interest or preferred dividends.

a. Non-payment of bond interest can trigger a company into bankruptcy.This option is Correct: Bonds…

Answered: Regarding the use of bonds or preferred…

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter4: Bond Valuation

Section: Chapter Questions

Problem 17MC

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Which of the following statements are true about unsecured bonds?I. Income bonds require interest payments only if earned and non-payment of interest does not lead to bankruptcy. Usually issued during the reorganization of a firm facing financial difficulties. II. Debentures are unsecured long-term debt and backed only by the reputation and financial stability of the corporation. Because of this, the earning ability of the issuing corporation is of great concern to the bondholder.III. Claims of bondholders of subordinated debentures are honored only after the claims of secured debt and unsubordinated debentures have been satisfied. IV. Income bonds have longer maturity and unpaid interest is allowed to accumulate for some period of time and must be paid prior to the payment of any dividends to stockholders.
Briefly describe bankruptcy law. If a firm wereto default on its bonds, would the company beliquidated immediately? Would the bondholdersbe assured of receiving all of their promisedpayments?
52. Which of the following statements is incorrect?a. Firms will often voluntarily enter bankruptcy before they are forcedinto bankruptcy by their creditors.b. An indenture is a bond that is less risky than a subordinateddebenture.c. When a firm files for Chapter 11 bankruptcy, it may attempt torestructure its existing debt by changing (subject to creditorapproval) the interest payments, maturity, and/or principal amount.d. All else equal, mortgage bonds are less risky than debentures becausemortgage bonds provide investors with a lien (that is, a claim)against specific property.e. A company’s bond rating is affected by financial performance andprovisions in the bond contract.
A business declares bankruptcy causing it to default on its bond. Investors call this characteristic O credit risk. O interest risk O market risk private risk
46. One of the points below is the most accurate?a. After a company files for bankruptcy, the administrator liquidates it, using the money to compensate bondholders, overdue salaries, royalties, and legal fees.b. Where the price of the bond approaches the sinking fund call price, a company with a sinking fund payout due will typically opt to purchase back bonds on the open market.c. Income bonds incur dividends only after the amount of interest received by the corporation is directly earned. As a result, these securities cannot default a corporation, making them better for investors than traditional bonds.d. One drawback to zero coupon bonds being that the tax gains from selling securities are not realised before the bonds maturity.e. Callable bonds should have a lower yield to maturity than noncallable bonds, assuming all other factors remain stable.
Which of the following statements is most correct? Why?* choices: a. The expected return on corporate bonds will generally exceed the yield to maturity. b. Firms that are in financial distress are forced to declare bankruptcy. c. All else equal, senior debt will generally have a lower yield to maturity than subordinated debt. d. Statements a and c are correct. e. None of the statements above is correct.
If a company has declared bankruptcy, its financial statements likely violate: Multiple Choice O O O O The stable monetary unit assumption. The fair value measurement approach. The going concern assumption. The present value measurement approach.
Which one of the following events must occur before a firm can offer a liquidating dividend? A. Negative equity B.Insolvency declaration C. Asset sale D. Failed bond issue
Why would a company wish to reduce its bond indebtednessbefore its bonds reach maturity? Indicate how thiscan be done and the correct accounting treatment forsuch a transaction.
Why would the company redeem the bonds prior to the maturity date if they were going to recognize a loss? Can you think of an example of such a decision we might face in our personal lives?
Which of the following statements is CORRECT? a. Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. b. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. c. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued. d. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price. e. A sinking fund provision makes a bond more risky to investors at the time of issuance.
Which of the following statements is CORRECT? a. One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature. b. Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds. c. Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees. d. Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond. e. A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.

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