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?
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
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.
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?
5. Which of the following statements is FALSE? a. In the extreme case, the debt holders take legal ownership of the firm's assets through a process called bankruptcy. b. Equity holders expect to receive dividends and the firm is legally obligated to pay them. c. A firm that fails to make the required interest or principal payments on the debt is in default. d. After a firm defaults, debt holders are given certain rights to the assets of the firm.
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.
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 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.
Please answer “True” or “False” to the following statements. Only long-term debt is first in line to be paid on the liquidation or sale of a company. Convertible debt can never have an impact on the ownership percentage of a company. Factoring is a method for companies with high risk accounts receivable to insure the receipt of at least some of the cash owed to them. Leasing is not considered a debt for balance sheet and liquidity purposes. A company with a liquidity covenant of $500,000 must maintain that amount of available cash at all times.

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