Question 1

The trustee in the bankruptcy settlement for the Edsel Corp. lists the following book values and liquidation values for the assets of the corporation. Liabilities and shareholders' claims are shown below.
   Assume the administrative costs of bankruptcy, workers allowable wages and source deductions add up to $100,000. (Administrative costs $75,000)
Indicate how much (in dollars) the following parties will receive in liquidation:
A) Common shareholders
B) Secured creditor holding the first lien
C) Senior unsecured debt holder

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Question 2

Describe the characteristics of a Strip Bond.

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Question 3

List and rank from highest to lowest the 8 possible ratings a bond can have, as determined by Dominion Bond Rating Service and S&P's rating service. What factors determine these ratings? What influence do the ratings have?

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Question 4

It is time for the renewal of existing photocopying equipment at Runt Ltd. New equipment will cost $95,000 and this amount can be borrowed from the local bank at 7 percent interest with annual payments at the end of the year. The CCA rate on the equipment would be 20 percent. The equipment will be salvaged in 5 years for $24,000. The current equipment is worth $12,500. Runt could also lease the equipment with annual lease payments of $20,000 payable at the beginning of each year, which would avoid the annual maintenance expense of $1,250 involved if they purchase the equipment. Cost of capital is 14 percent. The tax rate is 40 percent.
Should Runt Ltd. lease or borrow to purchase the photocopying equipment?
n = 5 T = 40% k = 15% d = 20
Discount rate (r or i) = 7% (1 -.40) = 4.2%

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Question 5

Shannon Corporation has two bonds outstanding. Both bonds have coupon rates of 10% and one has a maturity of 10 years, while the other has a maturity of 20 years. Interest is paid semi-annually. Calculate the following for both bonds.
A) If market rates for bonds of equal risk fell to 8% what would be the maximum price an investor would be willing to pay for these bonds?
B) If market rates for bonds of equal risk remained at 10%, what would be the bonds' current worth?
C) If market rates for bonds of equal risk rose to 12%, what would be the bonds' theoretical value?
Bond A: 10 years semiannually = 20 periods
Bond B: 20 years semiannually = 40 periods

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Question 6

Describe the characteristics of a zero-coupon rate bond.

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Question 7

Robinson's Golf and Relaxation World is issuing bonds with 9% coupon rates that will mature 10 years from today. The bonds pay interest annually and the bond is currently selling for $950.
Calculate:
A) nominal yield
B) current yield
C) yield to maturity

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Question 8

Gray House is issuing bonds with 10.5% coupon rates that will mature 15 years from today. The bonds pay interest semi-annually and the bond is currently selling for $980.
Calculate:
A) nominal yield
B) current yield
C) yield to maturity

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Question 9

Dairy Corp. has a $10 million bond obligation outstanding which it is considering refunding. The bonds were issued at 12% and the interest rates on similar bonds have declined to 10%. The bonds have 12 years of their 20-year maturity remaining. Dairy will pay a call premium of 6% and will incur underwriting costs of $400,000 immediately. There is no underwriting cost consideration on the old bond. The company is in a 40% tax bracket. There is no overlap interest period. Should the old issue be refunded?

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Question 10

Describe the characteristics of a Floating-Rate Bond.

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Question 11

Describe the characteristics of a Eurobond.

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Question 12

Discuss the advantages and disadvantages of debt as a financing method.

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Quiz 16: Long-Term Debt and Lease Financing