Answer Choices:
a. True
b. False
Answer: a. True
Question: In the lease-versus-buy decision, leasing is often preferable
Answer Choices:
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 lease 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.
Answer: 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.
Question: From the lessee viewpoint, the riskiness of the cash flows, with the possible exception of the residual value, is about the same for a lease as it is for a purchase.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A lease-versus-purchase analysis should compare the cost of leasing to the cost of owning, assuming that the asset
Answer Choices:
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.
Answer: c. is financed with debt whose maturity matches the term of the lease.
Question: Legal and economic differences among countries, although important, do NOT pose significant problems for most multinational corporations when they coordinate and control worldwide operations and subsidiaries.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Most convertible securities are bonds or preferred stocks that, under specified terms and conditions, can be exchanged for common stock at the option of the holder.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A detachable warrant is a warrant that can be removed from the security with which it was issued and traded separately from it. Most traded warrants are originally attached to bonds or preferred stocks.
Answer Choices:
a. True
b. False
Answer: a. True
Question: FAS 13 requires that for an unqualified audit report, financial (or capital) leases must be included in the balance sheet by reporting the
Answer Choices:
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.
Answer: c. present value of future lease payments as an asset and also showing this same amount as an offsetting liability.
Question: Operating leases often have terms that include
Answer Choices:
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.
Answer: a. maintenance of the equipment by the lessor.
Question: Which of the following statements about convertibles is most CORRECT?
Answer Choices:
a. The coupon interest rate on a firm’s convertibles is generally set higher than the market yield on its otherwise similar straight debt.
b. One advantage of convertibles over warrants is that the issuer receives additional cash money when convertibles are converted.
c. Investors are willing to accept a lower interest rate on a convertible than on otherwise similar straight debt because convertibles are less risky than straight debt.
d. At the time it is issued, a convertible’s conversion (or exercise) price is generally set equal to or below the underlying stock’s price.
e. For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm’s otherwise similar straight debt and the expected return on its common stock.
Answer: e. For equilibrium to exist, the expected return on a convertible bond must normally be between the expected return on the firm’s otherwise similar straight debt and the expected return on its common stock.
Question: Which of the following statements concerning warrants is most CORRECT?
Answer Choices:
a. Bonds with warrants and convertible bonds both have option features that their holders can exercise if the underlying stock’s price increases. However, if the option is exercised, the issuing company’s debt declines if warrants are used but remains the same if convertibles are used.
b. Warrants are long-term put options that have value because holders can sell the firm’s common stock at the exercise price regardless of how low the market price drops.
c. Warrants are long-term call options that have value because holders can buy the firm’s common stock at the exercise price regardless of how high the stock’s price has risen.
d. A firm’s investors would generally prefer to see it issue bonds with warrants than straight bonds because the warrants dilute the value of new shareholders, and that value is transferred to existing shareholders.
e. A drawback to using warrants is that if the firm is very successful, investors will be less likely to exercise the warrants, and this will deprive the firm of receiving any new capital.
Answer: c. Warrants are long-term call options that have value because holders can buy the firm’s common stock at the exercise price regardless of how high the stock’s price has risen.
Question: Which of the following is most CORRECT?
Answer Choices:
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.
Answer: d. Capital, or financial, leases generally provide for maintenance by the lessor.
Question: The owner of a convertible bond owns, in effect, both a bond and a call option.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Which of the following statements is most CORRECT?
Answer Choices:
a. Preferred stock generally has a higher component cost of capital to the firm than does common stock.
b. By law in most states, all preferred stock must be cumulative, meaning that the compounded total of all unpaid preferred dividends must be paid before any dividends can be paid on the firm’s common stock.
c. From the issuer’s point of view, preferred stock is less risky than bonds.
d. Whereas common stock has an indefinite life, preferred stocks always have a specific maturity date, generally 25 years or less.
e. Unlike bonds, preferred stock cannot have a convertible feature.
Answer: c. From the issuer’s point of view, preferred stock is less risky than bonds.
Question: The problem of dilution of stockholders’ earnings never results from the sale of call options, but it can arise if warrants are used.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Multinational financial management requires that financial analysts consider the effects of changing currency values.
Answer Choices:
a. True
b. False
Answer: a. True
Question: A convertible debenture can never sell for more than its conversion value or less than its bond value.
Answer Choices:
a. True
b. False
Answer: b. False
Question: Under a sale and leaseback arrangement, the seller of the leased property is the lessee and the buyer is the lessor.
Answer Choices:
a. True
b. False
Answer: a. True
Question: Preferred stock normally has no voting rights. However, most preferred issues stipulate that the preferred stockholders can elect a minority number of the directors if the preferred dividend is omitted.
Answer Choices:
a. True
b. False
Answer: a. True