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Exam 13: Long-Term Debt and Leasing

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Question 31

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Callable bonds may not be called immediately after a rate decrease because

A) the call price if often at a premium above par value.
B) the call provision is often deferred for several years after the bond's issue.
C) recalling the old bonds and issuing new ones involves non-trivial flotation costs.
D) all of the above.

E) A) and D)
F) A) and C)

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Question 32

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NARRBEGIN: Bear Lake Lease Purchase Bear Lake Equipment Company (BLEC) Bear Lake Equipment Company (BLEC) is considering an expansion which will require a new machine that costs $125,000.BLEC can either lease or buy the equipment.The company's tax rate is 40% and its after tax cost of debt is 5%. Lease: Annual payments of $26,400 made at the beginning of each year over five years.The lessor covers all maintenance,while the lessee covers insurance and other costs.The lessee has the option to purchase the machine for $31,250 paid along with the final lease payment. Purchase: The $125,000 cost will be financed over five years with annual end of year payments of $31,580.The machine will be depreciated on the five year MACRS schedule,and the firm will pay $3,500 per year for a service contract to cover all maintenance.The company will cover all insurance and other costs. -Refer to BLEC.What is the after tax cash flow for the first year from a purchase of the machine?

A) $31,583
B) $21,167
C) $19,515
D) $25,000

E) C) and D)
F) B) and D)

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Question 33

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You are contemplating leasing a new car.The monthly lease payments (to be made at the end of each months) are for 36 months.At the end of the lease you have the option of purchasing the car for $17,800.If you could finance the car at 5.9% for the same period,what is the most that you should be willing to pay in monthly lease payments if the sticker price of the car is $25,800?

If a bond issue has a sinking fund provision then

NARRBEGIN: Loose Cannon refunding Loose Cannon Co. Loose Cannon Co.is evaluating a new $75 million bond issue,the proceeds of which would be used to call and retire its outstanding $75 million bonds.Details on both bond issues are presented below.The firm is in the 35% tax bracket. Old Bonds The old issue sold at par,with a coupon rate of 11 percent.It was issued five years ago with a twenty year maturity.The issue had $350,000 in flotation costs and carries a call price of $1150. New Bonds The new issue are expected to sell at par with an 8.5 percent coupon rate and a 15 year maturity.Flotation costs are forecast to be $500,000.Interest payments will overlap for 2 months while the old bonds are retired. -Refer to Loose Cannon Co.What is the NPV of the refunding decision?

Which of the following qualifies as a foreign bond?

NARRBEGIN: Bavarian Brew Bond Bavarian Brew Bond Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34% -Refer to Bavarian Brew Bond.What are the annual tax savings from the amortization of the discount on the old bond?

What is the accounting capitalized value of an operating lease that involves payments of $8,000 per year (at the end of each year) for 12 years with no possibility of purchase at the end of the lease term.Assume that the firm is in the 35% marginal tax rate and the pre-tax cost of debt for the firm is 12%?

NARRBEGIN: Bavarian Brew Bond Bavarian Brew Bond Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34% -Refer to Bavarian Brew Bond.What are the annual after tax savings from paying off the old bonds?

When one firm sells an asset to another for cash and then leases the asset from its new owner,it is known as a:

A bond issue with specifically designated bonds maturing each year is a(n)

NARRBEGIN: Bavarian Brew Bond Bavarian Brew Bond Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34% -How much overlapping interest does Bavarian Brew have to pay on the old bonds after taxes?

NARRBEGIN: Bavarian Brew Bond Bavarian Brew Bond Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34% -Refer to Bavarian Brew Bond.What are the annual after tax debt payments on the new bond?

For a typical callable bond,what is the call price for 12% coupon bond?

Which type of lease has a term which is generally shorter than the economic life of the asset being leased?

NARRBEGIN: Bavarian Brew Bond Bavarian Brew Bond Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34% -Refer to Bavarian Brew Bond.What is the tax reduction caused by the unamortized discount on the old bonds?

NARRBEGIN: Bavarian Brew Bond Bavarian Brew Bond Bavarian Brew is thinking about recalling $30 million of 15 year,$1,000 par value bonds,that were issued ten years ago.The bonds carry a coupon rate of 7.8% and have a call price of $1,110.Initially the bonds generated total proceeds of $28.65 million and the flotation costs were $500,000.Bavarian Brew wants to sell $30 million of 5 year,$1,000 par value bonds with a 5.8% coupon rate to retire the old bonds.The flotation costs on the new bond issue are estimated to be $525,000.Due to having to issue the new bonds before the old bonds can be retired the company expects a period of 3 months were they have to pay interest on the old and the new bonds.Assume a tax rate of 34% -Refer to Bavarian Brew Bond.What are the annual net cash flow savings from issuing the new bonds?

Louis International has a lease with payments of $750,000 made at the beginning of each year.If no purchase option exists,and the company is in the 40% tax bracket,what is the annual after-tax cash outflow on the lease?

Which of the following is not an example of a negative covenant?

How do project finance (PF) loans differ from other syndicated loans?