EBK CONTEMPORARY FINANCIAL MANAGEMENT
14th Edition
ISBN: 9781337514835
Author: MOYER
Publisher: CENGAGE LEARNING - CONSIGNMENT
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Chapter 1, Problem 13QTD
Summary Introduction
To discuss: The reason why holders of bond need to block the transaction and arguments of person X for and against bond holder’s situation.
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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.
1) What would happen to the standard of living in the United States if people lost faith in our financial markets? Why?
2) How does a profitable capital market help reduce the prices of goods and services?
3) The SEC attempts to protect investors who purchase newly issued securities by requiring issuers to provide relevant financial information to potential investors. The SEC does not provide an opinion on the actual value of the securities.Therefore, a reckless investor could pay too much for some shares and consequently lose a lot. Do you think the SEC should, as part of each new offering of stocks or bonds, give investors an opinion on the appropriate value of the securities being offered? Explain
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?
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EBK CONTEMPORARY FINANCIAL MANAGEMENT
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- The SEC attempts to protect investors who are purchasing newly issued securities by making sure that the information put out by a company and its investment banks is correct and is not misleading. However, the SEC does not providean opinion about the real value of the securities; hence, an investor might paytoo much for some new stock and consequently lose heavily. Do you think theSEC should, as a part of every new stock or bond offering, render an opinion toinvestors on the proper value of the securities being offered? Explain.arrow_forwardThe company's bank won't lend it any more money than it already has, and investment bankers have said that debentures are out of the question. The treasurer has asked you to do some research and suggest a few ways in which bonds might be made attractive enough to allow the company to borrow. What does providing a restrictive indenture limiting the risk in future undertakings do? How does it make the bonds more attractive? Explain in great detail.arrow_forwardA company has an agreement with a bondholder that prevents it from selling several of its coal-fired power plants. However, recent regulatory changes have made these plants less profitable and the value of the firm is falling. Which of the following is this agreement called? Collateral trust Lien Indenture Debenturearrow_forward
- Liability under the Securities Acts. One of your firm’s clients, Fancy Fashions Inc., is a highly successful, rapidly expanding entity. It is owned predominantly by the Munster family and key corporate officials. Although additional funds would be available on a short-term basis from its bankers, they would represent only a temporary solution of the entity’s needfor capital to finance its expansion plans. In addition, the interest rates being charged are notappealing. Therefore, Chris Munster, Fancy’s chairman of the board, in consultation with theother shareholders, has decided to explore the possibility of raising additional equity capitalof approximately $15 million to $16 million. This will be Fancy’s first public offering.At a meeting of Fancy’s major shareholders, its attorneys and a member of your firmspoke about the advantages and disadvantages of “going public” and registering a stockoffering. One of the shareholders suggested that Regulation D under the Securities Act of1933…arrow_forwardIf the market value of a firm becomes less than its book value, it becomes an attractive takeover target.the firm will be delisted by the stock exchange.the Securities and Exchange Commission will not allow it to declare dividends until the market value once again exceeds the book value.the firm will be unable to service its debt.arrow_forwardWhich one of the following is true regarding the methods of issuing new equities? Issuing firms bear the risk of not able to sell entire shares in Firm Commitment method. Issuing firms bear risk of not able to sell entire shares in Best Effort method. Investment banks bear risk of not able to sell entire shares in Dutch Auction method. Investment banks bear risk of not able to sell entire shares in Best Effort method. None of the above.arrow_forward
- Which of the following actions would be most likely to reduce potential conflicts of interest between stockholders and bondholders? a. Compensating managers with stock options. b. Abolishing the Security and Exchange Commission. c. The use of covenants in bond agreements that limit the firm's use of additional debt and constrain managers' actions. d. Financing risky projects with additional debt. e. The threat of hostile takeovers.arrow_forwardWhich statement is FALSE regarding the difference between shareholders and bondholders? * Bondholders are mere creditors of the company to whom the company has to repay a certain amount. Shareholders are the real owners in the company. Shareholders have more rights (voting rights, priority at times of bankruptcy, payment preferences) than bondholders. Shareholders are more exposed to risks than bondholders.arrow_forwarda). Companies pay rating agencies to rate their bonds, and the costs can be substantial. However, companies are not required to have their bonds rated in the first place; doing so is strictly voluntary. So, why do they do it? b). Do bond ratings agencies have any conflict of interest when they rate bonds? Clearly explain your answer.arrow_forward
- Which of the following is a disadvantage to a corporation issuing bonds? Group of answer choices A)The required interest payment must be met each period. B)The liquid nature of the bonds makes them attractive to investors who may not want to hold them to maturity. c)The large principal payment due at maturity. d)Both the first and third answers above are both disadvantages. e)The first, second and third answers above are all disadvantages.arrow_forwardWhich 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.arrow_forwardRoss’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over the management of the company. Changes in consumer demand have made it hard for Ross to attract customers. Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s…arrow_forward
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