Details of this Paper

finance data bank

Description

solution


Question

Question;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

 

Paper#50965 | Written in 18-Jul-2015

Price : $22
SiteLock