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Chapter 5: 6DQ (page 471)
Do corporations rely more on external or internal funds as sources of financing?
Corporations rely more on external funds than internal as sources of financing.
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How might a leveraged buyout eventually lead to high returns for a company?
Howell Auto Parts is considering whether to borrow funds and purchase an asset or to lease the asset under an operating lease arrangement. If the company purchases the asset, the cost will be \(10,000. It can borrow funds for four years at 12 percent interest. The firm will use the three-year MACRS depreciation category (with the associated four-year write-off). Assume a tax rate of 35 percent.
The other alternative is to sign two operating leases, one with payments of \)2,600 for the first two years, and the other with payments of $4,600 for the last two years. In your analysis, round all values to the nearest dollar.
c. Compute the amortization schedule for the loan. (Disregard a small difference from a zero balance at the end of the loan鈥攄ue to rounding.)
Question:The yield to maturity for 10-year bonds is as follows for four different bond rating categories:
Aaa 9.40% Aa2 10.00%
Aa1 9.60% Aa3 10.60%
The bonds of Falter Corporation were rated as Aaa and issued at par a few weeks ago. The bonds have just been downgraded to Aa2. Determine the new price of the bonds, assuming a 10-year maturity and semiannual interest payments. (Refer to 鈥淪emiannual Interest and Bond Prices鈥� in Chapter 10 for a review if necessary.)
Match the yield to maturity in column 2 with the security provisions (or lack thereof) in column 1. Higher returns tend to go with greater risk.
(1) (2)
Security Provision Yield to Maturity
a.Debenture a.6.85%
b.Secured debtb.8.20%
c.Subordinated debenture c.7.76%
The Omega Corporation has some excess cash that it would like to invest in marketable securities for a long-term hold. Its vice president of finance is considering three investments (Omega Corporation is in a 35 percent tax bracket and the tax rate on dividends is 20 percent). Which one should she select based on aftertax return: (a) Treasury bonds at a 10 percent yield; (b) corporate bonds at a 13 percent yield; or (c) preferred stock at an 11 percent yield?
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