Question

Which of these financial instruments has a purely fixed claim on a company's cash flow?

                a.Bonds

                b.Common stock

                c.Preferred stock

Select the correct rule of thumb for calculating the time value of money.

                a."Future value is greater than present value, multiply present value to get future value"

                b."Future value is less than present value, multiply present value to get future value"

                c."Present value is greater than future value, multiply present value to get future value"

Select the appropriate choices for calculating cost of capital.

                a."Book value of debt, book value of equity"

                b."Market value of debt, book value of equity"

                c."Book value of debt, market value of equity"

If a company needs to raise a large amount of money, will doing so with debt rather than equity increase or decrease financial flexibility in the future?"

                a.Increase

                b.Decrease

In the event a company liquidates its assets in bankruptcy, equity holders must get paid before bond holders because they are owners of the company."

a. True

b. False

High-yield bonds, also known as junk bonds, pay higher coupon rates because the companies that issue them are seen as more likely to have financial problems and unable to repay their bondholders."

a.True

b. False

There is not one single right answer for whether a company should finance through debt or equity. Instead, it is situational and depends on many factors."

a.True

b.False

Answer 1

1. a- Bonds have a purely fixed claim on company's cash flow.

2. a- Future value is greater than present value, multiply present value to get future value.

3. c- Book value of debt, market value of equity.

4. a- Increase. Compared to equity, debt financing offers some flexibility but also presents some restrictions.

5. b- False. Bondholders are paid before shareholders because they've lent the company money unlike equity shareholders only have a residual claim on the assets of the company.

6. a- True. High-yield bonds offer higher interest rates as they carry low credit rating and have had a default history. The risk is higher for these bonds.

7. a - True. Each industry and company has its own set of requirements. The right financiang is a mix of both debt and equity though it is situational.