Question

1)When considering how to finance the acquisition of an asset, which of the following statements is true?

A) The amount borrowed should be larger than the cost of the assets acquired.

B) The cash flows generated by the assets should dictate the type of note (noninterest bearing, installment, etc) the company uses to finance the asset.

C) The cash flow required by the type of note used should dictate the type of asset acquired.

D) In order to minimize debt the company should not borrow unless there is no cash to fund the acquisition of the asset.

2) Which of the following is NOT a true statement about bonds?

A) A company that issues bonds is (typically) borrowing money from the public not a specific person or institution.

B) A bond's prices in the secondary market changes as the market interest changes over time.

C) Bonds can be turned in by their holders prior to their maturity date and receive the bond's face value.

D) When a company issues convertible bonds it will not have to pay the face value of the bonds if the bonds are converted before the bond's maturity date.

3) A loss due to impairment is recorded when:

A) The asset is sold for less than its book value.

B)   An asset’s fair value temporarily drops below its book value.

C)   An asset is damaged during operations.

D)   An asset’s fair value permanently drops below its book value

Answer 1

Solution 1:

When considering how to finance the acquisition of an asset, the cash flows generated by the assets should dictate the type of note (noninterest bearing, installment, etc) the company uses to finance the asset.

Hence, option "B" is correct.

Solution 2:

"Bonds can be turned in by their holders prior to their maturity date and receive the bond's face value" is not a true statement.

Hence Option "C" is correct.

Solution 3:

A loss due to impairment is recorded when an asset’s fair value permanently drops below its book value.

Hence option "D" is correct.