Fundamentals of Corporate Finance
11th Edition
ISBN: 9781259870576
Author: Ross
Publisher: MCG
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Chapter 7, Problem 9CRCT
Summary Introduction
To discuss: The reason why companies do not rate junk bonds
Introduction:
A bond refers to the debt securities issued by the governments or corporations for raising capital. The borrower does not return the face value until maturity. However, the investor receives the coupons every year until the date of maturity.
Junk bonds are bonds with a rating below the investment grade. The rating agencies rate junk bonds below the investment grade (BBB or Bbb). Hence, junk bonds will have ratings such as BB, Ba, B, CCC, Caa, CC, Ca, C, and D. The yields and the default risk of junk bonds are very high.
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Which of the following is a long-term financing option for a company?A) Accounts PayableB) Bank OverdraftC) Issuing BondsD) Trade Credit need help
Which of the following is a long-term financing option for a company?A) Accounts PayableB) Bank OverdraftC) Issuing BondsD) Trade Credit
EPS and optimal debt ratio Williams Glassware has estimated, at various debt ratios, the
expected earnings per share and the standard deviation of the earnings per share as shown in
the following table. (Click on the icon here in order to copy the contents of the data table
below into a spreadsheet.)
Earnings per share (EPS) Standard deviation of EPS
Debt ratio
0%
20
40
60
80
$2.31
3.02
3.49
3.96
3.85
$1.15
1.82
2.84
3.98
5.59
a. Estimate the optimal debt ratio on the basis of the relationship between earnings per share
and the debt ratio. You will probably find it helpful to graph the relationship.
b. Graph the relationship between the coefficient of variation and the debt ratio. Label the areas
associated with business risk and financial risk.
Chapter 7 Solutions
Fundamentals of Corporate Finance
Ch. 7.1 - What are the cash flows associated with a bond?Ch. 7.1 - What is the general expression for the value of a...Ch. 7.1 - Is it true that the only risk associated with...Ch. 7.2 - Prob. 7.2ACQCh. 7.2 - Prob. 7.2BCQCh. 7.2 - Prob. 7.2CCQCh. 7.3 - What does a bond rating say about the risk of...Ch. 7.3 - What is a junk bond?Ch. 7.4 - Prob. 7.4ACQCh. 7.4 - What do you think would be the effect of a put...
Ch. 7.5 - Why do we say bond markets may have little or no...Ch. 7.5 - Prob. 7.5BCQCh. 7.5 - What is the difference between a bonds clean price...Ch. 7.6 - What is the difference between a nominal and a...Ch. 7.6 - What is the Fisher effect?Ch. 7.7 - What is the term structure of interest rates? What...Ch. 7.7 - What is the Treasury yield curve?Ch. 7.7 - What six components make up a bonds yield?Ch. 7 - Prob. 7.1CTFCh. 7 - The 10-year bonds issued by KP Enterprises were...Ch. 7 - Prob. 7.4CTFCh. 7 - Prob. 7.6CTFCh. 7 - The term structure of interest rates is based on...Ch. 7 - Treasury Bonds [LO1] Is it true that a U.S....Ch. 7 - Interest Rate Risk [LO2] Which has greater...Ch. 7 - Treasury Pricing [LO1] With regard to bid and ask...Ch. 7 - Prob. 4CRCTCh. 7 - Call Provisions [LO1] A company is contemplating a...Ch. 7 - Coupon Rate [LO1] How does a bond issuer decide on...Ch. 7 - Prob. 7CRCTCh. 7 - Prob. 8CRCTCh. 7 - Prob. 9CRCTCh. 7 - Term Structure [LO5] What is the difference...Ch. 7 - Crossover Bonds [LO3] Looking back at the...Ch. 7 - Municipal Bonds [LO1] Why is it that municipal...Ch. 7 - Bond Market [LO1] What are the implications for...Ch. 7 - Prob. 14CRCTCh. 7 - Bonds as Equity [LO1] The 100-year bonds we...Ch. 7 - Prob. 1QPCh. 7 - Interpreting Bond Yields [LO2] Suppose you buy a 7...Ch. 7 - Prob. 3QPCh. 7 - Prob. 4QPCh. 7 - Coupon Rates [LO2] Essary Enterprises has bonds on...Ch. 7 - Bond Prices [LO2] Sqeekers Co. issued 15-year...Ch. 7 - Prob. 7QPCh. 7 - Coupon Rates [LO2] DMA Corporation has bonds on...Ch. 7 - Zero Coupon Bonds [LO2] You find a zero coupon...Ch. 7 - Valuing Bonds [LO2] Yan Yan Corp. has a 2,000 par...Ch. 7 - Valuing Bonds [LO2] Union Local School District...Ch. 7 - Calculating Real Rates of Return [LO4] If Treasury...Ch. 7 - Prob. 13QPCh. 7 - Prob. 14QPCh. 7 - Nominal versus Real Returns [LO4] Say you own an...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Using Treasury Quotes [LO2] Locate the Treasury...Ch. 7 - Bond Price Movements [LO2] Bond X is a premium...Ch. 7 - Interest Rate Risk [LO2] Both Bond Sam and Bond...Ch. 7 - Interest Rate Risk [LO2] Bond J has a coupon rate...Ch. 7 - Prob. 21QPCh. 7 - Prob. 22QPCh. 7 - Accrued Interest [LO2] You purchase a bond with an...Ch. 7 - Prob. 24QPCh. 7 - Finding the Bond Maturity [LO2] Shinoda Corp. has...Ch. 7 - Prob. 26QPCh. 7 - Bond Prices versus Yields [LO2] a. What is the...Ch. 7 - Prob. 28QPCh. 7 - Zero Coupon Bonds [LO2] Suppose your company needs...Ch. 7 - Finding the Maturity [LO2] Youve just found a 10...Ch. 7 - Prob. 31QPCh. 7 - Components of Bond Returns [LO2] Bond P is a...Ch. 7 - Holding Period Yield [LO2] The YTM on a bond is...Ch. 7 - Valuing Bonds [LO2] Jallouk Corporation has two...Ch. 7 - Valuing the Call Feature [LO2] At one point,...Ch. 7 - Prob. 36QPCh. 7 - Real Cash Flows [LO4] When Marilyn Monroe died,...Ch. 7 - Prob. 38QPCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 7MCh. 7 - Prob. 8MCh. 7 - Financing SS Airs Expansion Plans with a Bond...Ch. 7 - Prob. 10M
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