Question 1 A sinking fund

Question 1
A sinking fund
A. shortens a bond issue's effective maturity
B. lengthens a bond issue’s effective maturity
C. gives the firm the option to "get out from under" the covenants in a debt issue D. is an option to repay debt
E. A and B
F. A and C
G. A and D
H. B and C
I. B and D
J. C and D
K. all but A
L. all but B
M all but C
.
N. all but D
O. all are true
P. none are true Question 2
If a firm refunds a debt issue
A. The replacement debt it uses must be the debt-service-parity alternative used to measure the net advantage of refunding
B. The net advantage of refunding must be positive
C. The firm issues new debt and repays the existing debt issue
D. The firm must use the debt issue's call provision
E. A and B
F. A and C G. A and D
H. B and C
I. B and D
J. C and D
K. all but A
L. all but B
M all but C
.
N. all but D
O. all are true
P. none are true Question 3
With all else equal, an option on a bond could be
A. A call the bondholder has, which increases the bond's coupon rate
B. A put the bondholder has, which lowers the
bond's coupon rate C. A call the issuing firm has, which increases the bond's coupon rate
D. A put the issuing firm has, which lowers the bond's coupon rate
E. A and B
F. A and C
G. A and D
H. B and C
I. B and D
J. C and D
K. all but A L. all but B
M all but C
.
N. all but D
O. all are true
P. none are true Question 4
A firm is considering refunding a $400 million debt issue with a lower coupon issue to lower
the firm's cost. The firm has correctly calculated the net advantage to refunding it (NA) to
be $25,485. In your professional judgment, would a firm go ahead and undertake this
refunding?
A ye
. s
B no
. Question 5
A firm has a 28% tax rate and has decided to issue $250 million of 12-year debt. If it makes
a U.S. public offering, the offering would carry an 8.5% coupon, paid semi-annually, and
issuing would cost $2 million. What is the after-tax cost (APY) of borrowing? Question 6
A firm has a 28% tax rate and has decided to issue $250 million of 12-year debt. If it makes
a Eurobond offering, the offering would carry an 8.5% coupon, paid annually, and issuing
would cost $2.25 million. What is the after-tax cost (APY) of borrowing? Question 7
A firm has a 28% tax rate and has decided to issue $250 million of 12-year debt. If it makes
a private offering, the offering would carry an 8.4% coupon, paid quarterly, and issuing
would cost $1.5 million. What is the after-tax cost (APY) of borrowing?
Question 8
Waste Management, Unlimited (WM) has a $220 million, 9.2% coupon (paid semiannually),
outstanding bond issue, which matures in exactly 8 years, and WM is considering refunding
the debt. The call price per $1,000-par-value bond is $1,092. The replacement debt would
have a 7.76% coupon (paid semiannually). The firm's tax rate is 30%. What is the net
advantage to refunding (NA) in this case? Question 9
Jack's Jumpin' Junk Joint has a 5.64% APR mortgage on his shop, which has a remaining
balance of $203,044.90. The loan has 9.25 more years (111 payments) of $2,351.89 per
month until the current mortgage will be paid off. Interest is a tax-deductible expense for
Jack, and Jack's tax rate is 28%. Jack can refinance the mortgage with a 4.68% APR 15-year
mortgage for a total after-tax cost to refinance of $7,245. What is Jack's net advantage to
refunding (NA) to refinance the mortgage, to the nearest dollar?
NOTE: The mortgages are installment loans (not like bonds, which are interest-only loans),
so you cannot simply plug values into Equation (20.4) to get the correct answer. Instead,
this situation is just like a home mortgage.