Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
12th Edition
ISBN: 9781259144387
Author: Richard A Brealey, Stewart C Myers, Franklin Allen
Publisher: McGraw-Hill Education
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Textbook Question
Chapter 24, Problem 3PS
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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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.
Identify 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.
Chapter 24 Solutions
Principles of Corporate Finance (Mcgraw-hill/Irwin Series in Finance, Insurance, and Real Estate)
Ch. 24 - Bond terms Select the most appropriate term from...Ch. 24 - Sinking funds For each of the following sinking...Ch. 24 - Security and seniority a. As a senior bondholder,...Ch. 24 - Prob. 4PSCh. 24 - Prob. 5PSCh. 24 - Private placements Explain the three principal...Ch. 24 - Prob. 7PSCh. 24 - Prob. 8PSCh. 24 - Convertible bonds True or false? a. Convertible...Ch. 24 - Prob. 10PS
Ch. 24 - Bond terms Bond prices can fall either because of...Ch. 24 - Prob. 13PSCh. 24 - Prob. 14PSCh. 24 - Security and seniority a. Residential mortgages...Ch. 24 - Prob. 16PSCh. 24 - Prob. 17PSCh. 24 - Call provisions a. If interest rates rise, will...Ch. 24 - Prob. 19PSCh. 24 - Covenants Alpha Corp. is prohibited from issuing...Ch. 24 - Prob. 21PSCh. 24 - Convertible bonds The Surplus Value Company had 10...Ch. 24 - Prob. 23PSCh. 24 - Convertible bonds Iota Microsystems 10%...Ch. 24 - Prob. 25PSCh. 24 - Convertible bonds Zenco Inc. is financed by 3...Ch. 24 - Tax benefits Dorlcote Milling has outstanding a 1...Ch. 24 - Convertible bonds This question illustrates that...Ch. 24 - Prob. 29PS
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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. 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_forwardIdentify the following as either an advantage (A) or a disadvantage (D) of bond financing for a company. A company earns a higher return with borrowed funds than it pays in interest.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_forwardTell 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_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_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_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_forward
- What is the most obvious difference between debt and equity financing? a. Principal and interest must be repaid for debt financing. b. Dividend payments are mandatory. c. Debt financing can result in loss of control. d. Equity financing is revenue and thus taxable.arrow_forwardWhich of the following is not a reason for the issuance of long-term liabilities? Debt financing dilutes ownership interest. Debt may be the only available source of funds. Debt financing may have a lower cost. Debt financing offers an income tax advantage.arrow_forward1. When the effective cost of debt is greater its the nominal cost,a. the initial net measurement of the bond is more than the face value.b. The net proceeds is more than the face value.c. The entity records a discount on the bond payable.d. The interest expense is less than the interest payments.2. Which of these statement are true? [S1] The dividend decision generally involves the same factors as the earnings retention decision. [S2] Under the Dividend Relevance Theory, dividends are valued more than capital gains.3. The cost of retained earnings is less than the cost of ordinary shares because ofa. the issuance cost.b. the trust fund doctrine.c. agency costs of free cash flow.d. the taxation on earnings.4. GHI Corp., a new and relatively unknown entity, has issued 5-year bonds with an interest rate of 30%. These may also be traded in by the holder for 5 ordinary shares for every P1,000 face value of the bond. GHI added this feature so that once it has better profits, it can entice…arrow_forward
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