MULTIPLE CHOICE

1.Quiz Company has a 12 year lease, with payments of $250,000 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?

a.$416,667

b.$250,000

c.$150,000

d.$100,000

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.

2.Refer to Loose Cannon Co. What is the initial investment required to refund the bonds?

a.$11,250,000

b.$8,614,375

c.$7,312,500

d.$3,937,500

3.Refer to Loose Cannon Co. What are the annual cash flows associated with the new bonds?

a.$4,143,750

b.$6,375,000

c.$4,132,083

d.$6,357,051

4.Refer to Loose Cannon Co. What is the NPV of the refunding decision?

a.$3,654,164

b.$5,356,375

c.$1,224,292

d.$8,614,375

5.Booyah Company has a callable bond issue, with 55,000 bonds with $1000 par outstanding. If the call price is $1125 per bond, and Booyah’s tax rate is 35%, what is the after-tax cost of calling the bonds?

a.$10,576,925

b.$2,406,250

c.$6,875,000

d.$4,468,750

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.

6.Refer to BLEC. What is the after-tax cash flow per year for the lease?

a.$26,400

b.$15,840

c.$10,560

d.$39,600

7.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

8.Refer to BLEC. What is the present value of the five years of after-tax cash flows from purchasing the machine?

a.$92,504

b.$108,120

c.$77,351

d.$123,273

9.If a 9%, $100,000 loan has a balance of $83,724 and an annual payment of $13,965 is to be made, what will the allocation of principal and interest be?

a.$9,000 interest, $4,965 principal

b.$7,535 interest, $6,430 principal

c.$6,430 interest, $7,535 principal

d.$4,965 interest, $9,000 principal

10.Contract terms that specify things a borrower “must”do are referred to as

a.instructive covenants

b.informative covenants

c.negative covenants

d.positive covenants

MULTIPLE CHOICE

1.Quiz Company has a 12 year lease, with payments of $250,000 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?

a.$416,667

b.$250,000

c.$150,000

d.$100,000

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.

2.Refer to Loose Cannon Co. What is the initial investment required to refund the bonds?

a.$11,250,000

b.$8,614,375

c.$7,312,500

d.$3,937,500

3.Refer to Loose Cannon Co. What are the annual cash flows associated with the new bonds?

a.$4,143,750

b.$6,375,000

c.$4,132,083

d.$6,357,051

4.Refer to Loose Cannon Co. What is the NPV of the refunding decision?

a.$3,654,164

b.$5,356,375

c.$1,224,292

d.$8,614,375

5.Booyah Company has a callable bond issue, with 55,000 bonds with $1000 par outstanding. If the call price is $1125 per bond, and Booyah’s tax rate is 35%, what is the after-tax cost of calling the bonds?

a.$10,576,925

b.$2,406,250

c.$6,875,000

d.$4,468,750

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.

6.Refer to BLEC. What is the after-tax cash flow per year for the lease?

a.$26,400

b.$15,840

c.$10,560

d.$39,600

7.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

8.Refer to BLEC. What is the present value of the five years of after-tax cash flows from purchasing the machine?

a.$92,504

b.$108,120

c.$77,351

d.$123,273

9.If a 9%, $100,000 loan has a balance of $83,724 and an annual payment of $13,965 is to be made, what will the allocation of principal and interest be?

a.$9,000 interest, $4,965 principal

b.$7,535 interest, $6,430 principal

c.$6,430 interest, $7,535 principal

d.$4,965 interest, $9,000 principal

10.Contract terms that specify things a borrower “must”do are referred to as

a.instructive covenants

b.informative covenants

c.negative covenants

d.positive covenants

MULTIPLE CHOICE

1.Quiz Company has a 12 year lease, with payments of $250,000 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?

a.$416,667

b.$250,000

c.$150,000

d.$100,000

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.

2.Refer to Loose Cannon Co. What is the initial investment required to refund the bonds?

a.$11,250,000

b.$8,614,375

c.$7,312,500

d.$3,937,500

3.Refer to Loose Cannon Co. What are the annual cash flows associated with the new bonds?

a.$4,143,750

b.$6,375,000

c.$4,132,083

d.$6,357,051

4.Refer to Loose Cannon Co. What is the NPV of the refunding decision?

a.$3,654,164

b.$5,356,375

c.$1,224,292

d.$8,614,375

5.Booyah Company has a callable bond issue, with 55,000 bonds with $1000 par outstanding. If the call price is $1125 per bond, and Booyah’s tax rate is 35%, what is the after-tax cost of calling the bonds?

a.$10,576,925

b.$2,406,250

c.$6,875,000

d.$4,468,750

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.

6.Refer to BLEC. What is the after-tax cash flow per year for the lease?

a.$26,400

b.$15,840

c.$10,560

d.$39,600

7.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

8.Refer to BLEC. What is the present value of the five years of after-tax cash flows from purchasing the machine?

a.$92,504

b.$108,120

c.$77,351

d.$123,273

9.If a 9%, $100,000 loan has a balance of $83,724 and an annual payment of $13,965 is to be made, what will the allocation of principal and interest be?

a.$9,000 interest, $4,965 principal

b.$7,535 interest, $6,430 principal

c.$6,430 interest, $7,535 principal

d.$4,965 interest, $9,000 principal

10.Contract terms that specify things a borrower “must”do are referred to as

a.instructive covenants

b.informative covenants

c.negative covenants

d.positive covenants

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