Question 1

An advantage of bonds is:
A)Bonds do not affect owner control.
B)Bonds require payment of par value at maturity.
C)Bonds can decrease return on equity.
D)Bond payments can be burdensome when income and cash flow are low.
E)Bonds require payment of periodic interest.

Accepted Answer

Bonds do not give ownership rights or control, allowing shareholders to retain control of the company.

Question 2

Charger Company's most recent balance sheet reports total assets of $27,000,000, total liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period is (rounded to two decimals):
A)0.56
B)1.80
C)0.44
D)0.80
E)1.25

Accepted Answer

The answer of Charger Company's most recent balance sheet reports...

Question 3

Seedly Corporation's most recent balance sheet reports total assets of $35,000,000 and total liabilities of $17,500,000. Management is considering issuing $5,000,000 of par value bonds (at par) with a maturity date of ten years and a contract rate of 7%. What effect, if any, would issuing the bonds have on the company's debt-to-equity ratio?
A)Issuing the bonds would cause the firm's debt-to-equity ratio to improve from 1.0 to 1.3.
B)Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from 1.0 to 1.3.
C)Issuing the bonds would cause the firm's debt-to-equity ratio to remain unchanged.
D)Issuing the bonds would cause the firm's debt-to-equity ratio to improve from .5 to .8.
E)Issuing the bonds would cause the firm's debt-to-equity ratio to worsen from .5 to .8.

Accepted Answer

The debt-to-equity (D/E) ratio of Seedly Corporation before issuing the bonds is:

D/E ratio = Total liabilities / Total equity = $17,500,000 / ($35,000,000 - $17,500,000) = 1.0

If Seedly Corporation issues $5,000,000 par value bonds with a 7% contract rate, it will increase its total liabilities by $5,000,000, and its total assets will remain the same. The new D/E ratio will be:

D/E ratio = (Total liabilities + Par value of bonds) / Total equity = ($17,500,000 + $5,000,000) / ($35,000,000 - $17,500,000) = 1.3

Therefore, issuing the bonds will cause the firm's D/E ratio to worsen from 1.0 to 1.3.

Question 4

A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value of an annuity factor for 7 years at 9% is 5.0330. The present value of the equipment and loan is:
A)$9,000.
B)$5,033.
C)$63,000.
D)$57,330.
E)$45,297.

Accepted Answer

The present value of the equipment and loan is calculated by multiplying the annual payment by the present value of an annuity factor: $9,000 * 5.0330 = $45,297.

Question 5

Saffron Industries most recent balance sheet reports total assets of $42,000,000, total liabilities of $16,000,000 and stockholders' equity of $26,000,000. Management is considering using $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds. What effect, if any, would prepaying the bonds have on the company's debt-to-equity ratio?
A)Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .50.
B)Prepaying the debt would cause the firm's debt-to-equity ratio to improve from .62 to .57.
C)Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .50.
D)Prepaying the debt would cause the firm's debt-to-equity ratio to worsen from .62 to .57.
E)Prepaying the debt would cause the firm's debt-to-equity ratio to remain unchangeD.Current Situation: Total Assets = Total Liabilities + Stockholders' Equity

Accepted Answer

The debt-to-equity ratio is calculated by dividing total liabilities by stockholders' equity. Currently, Saffron Industries' debt-to-equity ratio is 16,000,000/26,000,000 = 0.62. If the company were to use $3,000,000 of excess cash to prepay $3,000,000 of outstanding bonds, total liabilities would decrease by $3,000,000, and stockholders' equity would remain the same. Therefore, the new debt-to-equity ratio would be 13,000,000/26,000,000 = 0.5. This means that prepaying the bonds would cause the firm's debt-to-equity ratio to improve from 0.62 to 0.5. So, the correct answer is A.

Question 6

Which of the following statements is true?
A)Interest on bonds is tax deductible.
B)Interest on bonds is not tax deductible.
C)Dividends to stockholders are tax deductible.
D)Bonds do not have to be repaid.
E)Bonds always increase return on equity.

Accepted Answer

The answer of Which of the following statements is true?
A)Interest...

Question 7

When a bond sells at a premium:
A)The contract rate is above the market rate.
B)The contract rate is equal to the market rate.
C)The contract rate is below the market rate.
D)It means that the bond is a zero coupon bond.
E)The bond pays no interest.

Accepted Answer

When a bond sells at a premium, it means that the contract rate, which is the rate of interest promised by the issuer to the bondholder, is higher than the prevailing market interest rate. Investors are willing to pay more than the face value of the bond to receive the higher interest payments.

Question 8

The debt-to-equity ratio:
A)Is calculated by dividing book value of secured liabilities by book value of pledged assets.
B)Is a means of assessing the risk of a company's financing structure.
C)Is not relevant to secured creditors.
D)Can always be calculated from information provided in a company's income statement.
E)Must be calculated from the market values of assets and liabilities.

Accepted Answer

The debt-to-equity ratio is a tool used to assess a company's financing structure and indicates the relative proportion of debt and equity used to finance a company's assets. It is calculated by dividing total liabilities by total shareholder equity.

Question 9

A disadvantage of bond financing is:
A)Bonds do not affect owners' control.
B)Interest on bonds is tax deductible.
C)Bonds can increase return on equity.
D)It allows firms to trade on the equity.
E)Bonds require cash payments of periodic interest and the repayment of par value at maturity.

Accepted Answer

Bonds require cash payments of periodic interest and the repayment of par value at maturity. This can be a disadvantage because it requires the company to have a reliable source of cash flow to make the required interest payments and to repay the bond at maturity. Failure to do so can result in default and damage to the company's credit rating.

Question 10

Collateral agreements for a note or bond can:
A)Reduce the risk of loss in comparison with unsecured debt.
B)Increase the risk of loss in comparison with unsecured debt.
C)Have no effect on risk.
D)Reduce the issuer's assets.
E)Increase total cost for the borrower.

Accepted Answer

Collateral agreements provide security for lenders in case of a borrower's default. This reduces the risk of loss for the lender and can make the debt less risky than unsecured debt.

Question 11

The party that has the right to exercise a call option on callable bonds is:
A)The bondholder.
B)The bond issuer.
C)The bond indenture.
D)The bond trustee.
E)The bond underwriter.

Accepted Answer

The bond issuer has the right to call the bond, which means they can redeem the bond at a specified price before the maturity date. This is typically done when interest rates decrease and the issuer can refinance at a lower rate.

Question 12

A company's total liabilities divided by its total stockholders' equity is called the:
A)Equity ratio.
B)Return on total assets ratio.
C)Pledged assets to secured liabilities ratio.
D)Debt-to-equity ratio.
E)Times secured liabilities earned ratio.

Accepted Answer

The debt-to-equity ratio is used to determine the amount of debt a company has compared to its equity. This ratio is found by dividing the company's total liabilities by its total stockholders' equity.

Question 13

A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest. The present value of an annuity factor for 6 years at 7% is 4.7665. The annual annuity payments equal:
A)$10,489.88.
B)$8,391.91.
C)$40,000.00.
D)$52,450.00.
E)$190,660.00.

Accepted Answer

The answer of A company borrowed $40,000 cash from the...

Question 14

A bond is issued at par value when:
A)The bond pays no interest.
B)The issue price is greater than the maturity price.
C)Straight line amortization is used by the company.
D)The market rate of interest is the same as the contract rate of interest.
E)The contract rate and market rate of interest are different.

Accepted Answer

A bond is issued at par value when the market rate of interest is the same as the contract rate of interest. This means that the bond's stated interest rate is equal to the prevailing market interest rate, and as a result, investors are willing to pay the full face value of the bond. The issue price is equal to the maturity price, and there is no premium or discount associated with the bond's sale.

Question 15

Which of the following accurately describes a debenture?
A)A bond with specific assets pledged as collateral.
B)A type of bond issued in the names and addresses of the bondholders.
C)A type of bond which requires the bond issuer to create a sinking fund of assets set aside at specified amounts and dates to repay the bonds.
D)A type of bond which is not collateralized but backed only by the issuer's general credit standing.
E)A type of bond that can be exchanged for a fixed number of shares of the issuing corporation's common stock.

Accepted Answer

A debenture is a type of bond that is not collateralized, but rather backed only by the issuer's general credit standing. The other choices describe specific types of bonds, such as asset-backed bonds (A), registered bonds (B), sinking fund bonds (C), and convertible bonds (E).

Question 16

A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it entered into. The loan is at 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938. The present value of the loan (rounded) is:
A)$15,877.
B)$12,400.
C)$5,592.
D)$9,200.
E)$47,630.

Accepted Answer

To calculate the present value of the loan, we need to use the formula:

Present value = Future value / (1 + r)n

where r is the annual interest rate and n is the number of years.

In this case, the future value is $20,000, r is 8%, and n is 3.

Using the present value factor for 3 years at 8%, we have:

Present value = $20,000 x 0.7938 = $15,876

Rounding the answer to the nearest dollar, we get a present value of $15,877.

Therefore, the best choice is A.

Question 17

A company borrowed cash from the bank by signing a 5-year, 8% installment note. The present value of an annuity factor at 8% for 5 years is 3.9927. Each annual payment equals $75,000. The present value of the note is:
A)$56,352.84.
B)$93,921.41.
C)$375,000.00.
D)$299,452.50.
E)$187,842.81.

Accepted Answer

The present value of the note is calculated by multiplying the annual payment by the present value of an annuity factor: $75,000 * 3.9927 = $299,452.50.

Question 18

All of the following statements regarding leases are true except:
A)For a capital lease the lessee records the leased item as its own asset.
B)For a capital lease the lessee depreciates the asset acquired under the lease, but for an operating lease the lessee does not.
C)Capital leases create a long-term liability on the balance sheet, but operating leases do not.
D)Capital leases do not transfer ownership of the asset under the lease, but operating leases often do.
E)For an operating lease the lessee reports the lease payments as rental expense.

Accepted Answer

The answer of All of the following statements regarding leases...

Question 19

A pension plan:
A)Is a contractual agreement between an employer and its employees in which the employer provides benefits to employees after they retire.
B)Can be underfunded if the plan assets are more than the accumulated benefit obligation.
C)Is always funded fully by employers.
D)Can be a defined benefit plan or an undefined benefit plan.
E)Is the same as Other Postretirement Benefits.

Accepted Answer

The answer of A pension plan:
A)Is a contractual agreement between...

Question 20

A bondholder that owns a $1,000, 10%, 10-year bond has:
A)Ownership rights in the issuing company.
B)The right to receive $10 per year until maturity.
C)The right to receive $1,000 at maturity.
D)The right to receive $10,000 at maturity.
E)The right to receive dividends of $1,000 per year.

Accepted Answer

A bondholder has the right to receive the face value of the bond at maturity, which in this case is $1,000. Ownership rights, dividends, and the other mentioned cash flows are not correct for a bondholder.

Quiz 10: Reporting and Analyzing Long-Term Liabilities

An advantage of bonds is:

Charger Company's most recent balance sheet reports total assets of $27,000,000, total liabilities of $15,000,000 and total equity of $12,000,000. The debt to equity ratio for the period is (rounded to two decimals) :

A company purchased equipment and signed a 7-year installment loan at 9% annual interest. The annual payments equal $9,000. The present value of an annuity factor for 7 years at 9% is 5.0330. The present value of the equipment and loan is:

Which of the following statements is true?

When a bond sells at a premium:

The debt-to-equity ratio:

A disadvantage of bond financing is:

Collateral agreements for a note or bond can:

The party that has the right to exercise a call option on callable bonds is:

A company's total liabilities divided by its total stockholders' equity is called the:

A company borrowed $40,000 cash from the bank and signed a 6-year note at 7% annual interest. The present value of an annuity factor for 6 years at 7% is 4.7665. The annual annuity payments equal:

A bond is issued at par value when:

Which of the following accurately describes a debenture?

A company must repay the bank a single payment of $20,000 cash in 3 years for a loan it entered into. The loan is at 8% interest compounded annually. The present value factor for 3 years at 8% is 0.7938. The present value of the loan (rounded) is:

A company borrowed cash from the bank by signing a 5-year, 8% installment note. The present value of an annuity factor at 8% for 5 years is 3.9927. Each annual payment equals $75,000. The present value of the note is:

All of the following statements regarding leases are true except:

A pension plan:

A bondholder that owns a $1,000, 10%, 10-year bond has: