PRIN.OF CORPORATE FINANCE
13th Edition
ISBN: 9781260013900
Author: BREALEY
Publisher: RENT MCG
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Textbook Question
Chapter 24, Problem 7PS
Security and seniority
- a. As a senior bondholder, would you like the company to issue more junior debt to finance its investment program, would you prefer it not to do so, or would you not care?
- b. You hold debt secured on the company’s existing property. Would you like the company to issue more unsecured debt to finance its investments, would you prefer it not to do so, or would you not care?
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Which of the following is an advantage of debt financing?
a. Excessive debt increases the risk of equity holders and therefore depresses share price.
b. The obligation is generally fixed in terms of interest and principal payments.
c. Interest and principal obligations must be paid regardless of the economic position of the firm.
d. Debt agreements contain covenants.
Identify the following as elther an advantage or a disadvantage of bond financing for a company.
a. Bonds increase return on equity if the company earns a higher return with borrowed funds than it pays in interest.
b. Interest on bonds is tax deductible.
c. Bonds require payment of par value at maturity.
d. Bonds do not affect owner control.
e. A company earns a lower return with borrowed funds than it pays in interest.
f. Unlike equity ownership, a par value payment is required at a specified date.
Advantage
Identify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company.
a. Requires payments of both periodic interest and par value at maturity.
b. Bonds require payment of par value at maturity.
C. Bonds do not affect owner control.
d. A company earns a lower return with borrowed funds than it pays in interest.
e. A company earns a higher return with borrowed funds than it pays in interest.
f. Bonds require payment of periodic interest.
Chapter 24 Solutions
PRIN.OF CORPORATE FINANCE
Ch. 24 - Bond terms Use Table 24.1 (but not the text) to...Ch. 24 - Bond terms Look at Table 24.1: a. The AMAT bond...Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Prob. 5PSCh. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 8PSCh. 24 - Prob. 9PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Sinking funds For each of the following sinking...
Ch. 24 - Call provisions a. Look at Table 24.1. Suppose...Ch. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 14PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Convertible bonds Maple Aircraft has issued a 4%...Ch. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 19PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Prob. 22PSCh. 24 - Prob. 23PSCh. 24 - Bank loans, commercial paper, and medium-term...Ch. 24 - Prob. 25PSCh. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 28PS
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Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.Similar questions
- Identify the following as either an advantage or a disadvantage of bond financing for a company. a. Bonds do not affect owner control. b. A company earns a lower return with borrowed funds than it pays in interest. c. A company earns a higher return with borrowed funds than it pays in interest. d. Bonds require payment of periodic interest. e. Interest on bonds is tax deductible. f. Bonds require payment of par value at maturity.arrow_forwardIdentify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. A company earns a lower return with borrowed funds than it pays in interest.arrow_forwardIdentify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. a. Large payments of par value are made at maturity. b. Unlike equity, bonds do not affect ownership of a company. C. A business earns a lower return with the funds from the bond than it pays in interest. d. A business earns a higher return with the funds from the bond than it pays in interest. e. Requires payments of interest even when cash flows are low. f. Bond interest payments reduce total taxes paid.arrow_forward
- 1. Explain what a unsecured debt, subordinated debt, senior debt is? -is there risk in buying an unsecured debt and subsequently having the corp issue a senior debt? - Which types of debt of these would have the lowest interest rate, the highest?arrow_forward3. Which is not considered as a debt security issued by private entities? a. Straight bonds b. Floating-rate corporate notes c. Commercial paper d. Acceptance e. All of the above f. None of the above Which is least likely correct about security valuation? a. The calculated or determined value considers the stream of future cash flows. b. The calculated or determined value equals the market price. c. The calculated or determined value considers the risks involved and the opportunity cost. d. The calculated or determined value allows the investors to evaluate whether a security is overvalued or undervalued. e. All of the abovearrow_forwardWhich of the following is not a capital market instrument? a. Corporate stock b. Mortgages c. Corporate bonds d. Repurchase agreementarrow_forward
- Tell whether the following statements describe the characteristics of stocks or bonds. e. Issues of a stake of ownership in a company. f. Investment that generally have higher reward. g. Debt that is made with an investors for cash exchange for interest. h. Investors can earn money if the security increases, but they can lose money if the security decreases. i. The seller agrees to pay interest on the loan at a fixed rate and schedule.arrow_forwardThe difference between equity financing and debt financing is that Group of answer choices A. equity financing involves borrowing money. B. debt financing involves selling part of the company. C. debt financing means the company has no debt. D. equity financing involves selling part of the company.arrow_forwardCase study: Debt vs. Equity Holders Companies obtain their funds from two sources: debt and equity. The providers of these funds are protected in different ways. Debtholders have specific contracts with the company, and if the company defaults they have recourse ahead of shareholders.Shareholders are the bearers of residual risk and in return for the uncertainty this creates, equity finance is more expensive than debtfinance- reflecting the risk premium and risk appetite of the shareholders. But, because the shareholders come last and it is not clear what they are entitled to, they operate in conditions of an incomplete contract.Question:If the shareholders’ position is not protected by a contract-unlike the provider of debt- how is it in fact made viable? Discuss.arrow_forward
- (1) What factors might lead a company to gainadditional funds through debt financing rather thanthrough equity financing? (2) Why does consumerdebt have a more negative connotation than businessdebt?arrow_forwardThere are advantages and disadvantages of debt financing in contrast to equity financing. Which of the following is less likely to represent an advantage of debt financing? a. The cost of debt should be lower than the cost of equity for most companies due to the lower risk to the lender and the tax deductibility of interest b. The repayment of debt capital may affect the liquidity of the company c. If the return on assets exceeds the cost of debt, then this will result in a higher return on shareholders’ funds as compared to the return on assets d. The increase in borrowings will not normally affect the voting control of the current shareholders as compared to the issue of shares e. Fixed interest rate loans will result in the variability in the market value of such loans over time which will normally be less than the variability in the value of the equity of the companyarrow_forward1. State 2 reasons why Net Present Value is a better decision criteria compared to other alternatives. 2. Why might a company prefer to issue secured bonds rather than unsecured bonds?arrow_forward
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