finance data bank

The City of Charleston issued $3,000,000 of 8% coupon, 30-year, semiannual payment, taxexempt muni bonds 10 years ago. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant.
a. $453,443
b. $476,115
c. $499,921
d. $524,917
e. $551,163

The State of Idaho issued $2,000,000 of 7% coupon, 20-year semiannual payment, tax-exempt
bonds 5 years ago. The bonds had 5 years of call protection, but now the state can call the
bonds if it chooses to do so. The call premium would be 5% of the face amount. Today 15-year,
5%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2%.
What is the net present value of the refunding? Because these are tax-exempt bonds, taxes are
not relevant.
a. $278,606 b. $292,536 c. $307,163 d. $322,521 e. $338,647

Thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding bond. Ignore tax considerations--assume that the firm's tax rate is zero.The company's decision of whether to call the bonds depends critically on the current interest rate on newly issued bonds. What is the breakeven interest rate, the rate below which it would be profitable to call in the bonds?
a. 9.57% b. 10.07% c. 10.60% d. 11.16% e. 11.72%

Rainier Bros. has 12.0% semiannual coupon bonds outstanding that mature in 10 years. Each bond is now eligible to be called at a call price of $1,060. If the bonds are called, the company must replace them with new 10-year bonds. The flotation cost of issuing new bonds is estimated to be $45 per bond. How low would the yield to maturity on the new bonds have to be in order for it to be profitable to call the bonds today, i.e., what is the nominal annual
"breakeven rate"?
a. 9.29% b. 9.78% c. 10.29% d. 10.81% e. 11.35%

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year
bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these
bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding?
a. $5,049,939 b. $5,315,725 c. $5,595,500 d. $5,890,000 e. $6,200,000

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year
bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these
bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called.What will the after-tax annual interest savings for NYW be if the refunding takes place?
a. $664,050 b. $699,000 c. $768,900 d. $845,790 e. $930,369

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year
bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these
bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What will the net increase or decrease in the annual flotation cost tax savings be if refunding takes
place?
a. $6,480 b. $7,200 c. $8,000 d. $8,800 e. $9,680

New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year
bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these
bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What is the NPV if NYW refunds its bonds today?
a. $1,746,987 b. $1,838,933 c. $1,935,719 d. $2,037,599 e. $2,241,359

From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same as the riskiness of the lessee's
a. equity cash flows.
b. capital budgeting project cash flows.
c. debt cash flows.
d. pension fund cash flows.
e. sales.

Operating leases often have terms that include
a. maintenance of the equipment by the lessor.
b. full amortization over the life of the lease.
c. very high penalties if the lease is cancelled.
d. restrictions on how much the leased property can be used.
e. much longer lease periods than for most financial leases.

Which of the following statements is most CORRECT?
a. Firms that use "off balance sheet" financing, such as leasing, would show lower debt ratios if
the effects of their leases were reflected in their financial statements.
b. Capitalizing a lease means that the firm issues equity capital in proportion to its current capital
structure, in an amount sufficient to support the lease payment obligation.
c. The fixed charges associated with a lease can be as high as, but never greater than, the fixed
payments associated with a loan.
d. Capital, or financial, leases generally provide for maintenance by the lessor.
e. A key difference between a capital lease and an operating lease is that with a capital lease, the lease payments provide the lessor with a return of the funds invested in the asset plus a return on the invested funds, whereas with an operating lease the lessor depends on the residual value to realize a full return of and on the investment.

Financial Accounting Standards Board (FASB) Statement #13 requires that for an unqualified audit
report, financial (or capital) leases must be included in the balance sheet by reporting the
a. residual value as a fixed asset.
b. residual value as a liability.
c. present value of future lease payments as an asset and also showing this same amount as an offsetting liability.
d. undiscounted sum of future lease payments as an asset and as an offsetting liability.
e. undiscounted sum of future lease payments, less the residual value, as an asset and as an
offsetting liability.

Heavy use of off-balance sheet lease financing will tend to
a. make a company appear more risky than it actually is because its stated debt ratio will be
increased.
b. make a company appear less risky than it actually is because its stated debt ratio will appear lower.
c. affect a company's cash flows but not its degree of risk.
d. have no effect on either cash flows or risk because the cash flows are already reflected in the
income statement.
e. affect the lessee's cash flows but only due to tax effects

In the lease versus buy decision, leasing is often preferable
a. because it has no effect on the firm's ability to borrow to make other investments.
b. because, generally, no down payment is required, and there are no indirect interest costs.
c. because lease obligations do not affect the firm's risk as seen by investors.
d. because the lessee owns the property at the end of the least term.
e. because the lessee may have greater flexibility in abandoning the project in which the leased property is used than if the lessee bought and owned the asset.

A lease versus purchase analysis should compare the cost of leasing to the cost of owning,
assuming that the asset purchased
a. is financed with short-term debt.
b. is financed with long-term debt.
c. is financed with debt whose maturity matches the term of the lease.
d. is financed with a mix of debt and equity based on the firm's target capital structure, i.e., at the WACC.
e. is financed with retained earnings.

Sutton Corporation, which has a zero tax rate due to tax loss carry-forwards, is considering a 5-
year, $6,000,000 bank loan to finance service equipment. The loan has an interest rate of 10%
and would be amortized over 5 years, with 5 end-of-year payments. Sutton can also lease the
equipment for 5 end-of-year payments of $1,790,000 each. How much larger or smaller is the
bank loan payment than the lease payment? Note: Subtract the loan payment from the lease
payment.
a. $177,169 b. $196,854 c. $207,215 d. $217,576 e. $228,455

Kohers Inc. is considering a leasing arrangement to finance some manufacturing tools that it
needs for the next 3 years. The tools will be obsolete and worthless after 3 years. The firm will
depreciate the cost of the tools on a straight-line basis over their 3-year life. It can borrow
$4,800,000, the purchase price, at 10% and buy the tools, or it can make 3 equal end-of-year
lease payments of $2,100,000 each and lease them. The loan obtained from the bank is a 3-year
simple interest loan, with interest paid at the end of the year. The firm's tax rate is 40%. Annual
maintenance costs associated with ownership are estimated at $240,000, but this cost would be
borne by the lessor if it leases. What is the net advantage to leasing (NAL), in thousands?
(Suggestion: Delete 3 zeros from dollars and work in thousands.)
a. $96 b. $106 c. $112 d. $117 e. $123

Dakota Trucking Company (DTC) is evaluating a potential lease for a truck with a 4-year life that
costs $40,000 and falls into the MACRS 3-year class. If the firm borrows and buys the truck, the
loan rate would be 10%, and the loan would be amortized over the truck's 4-year life, so the
interest expense for taxes would decline over time. The loan payments would be made at the
end of each year. The truck will be used for 4 years, at the end of which time it will be sold at an
estimated residual value of $10,000. If DTC buys the truck, it would purchase a maintenance
contract that costs $1,000 per year, payable at the end of each year. The lease terms, which
include maintenance, call for a $10,000 lease payment (4 payments total) at the beginning of
each year. DTC's tax rate is 40%. Should the firm lease or buy? (Note: MACRS rates for Years 1
to 4 are 0.33, 0.45, 0.15, and 0.07.)
a. $849 b. $896 c. $945 d. $997 e. $1,047

Buster's Beverages is negotiating a lease on a new piece of equipment that would cost $100,000 if purchased. The equipment falls into the MACRS 3-year class, and it would be used for 3 years and then sold, because the firm plans to move to a new facility at that time. The estimated value of the equipment after 3 years is $30,000. A maintenance contract on the equipment would cost $3,000 per year, payable at the beginning of each year. Alternatively, the firm could lease the equipment for 3 years for a lease payment of $29,000 per year, payable at the beginning of each year. The lease would include maintenance. The firm is in the 20% tax bracket, and it could obtain a 3-year simple interest loan, interest payable at the end of the
year, to purchase the equipment at a before-tax cost of 10%. If there is a positive Net Advantage to Leasing the firm will lease the equipment. Otherwise, it will buy it. What is the NAL?
a. $5,736 b. $6,023 c. $6,324 d. $6,640 e. $6,972