410_final_practice

410_final_practice - FI410 INTERMEDIATE FINANCIAL...

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FI410 INTERMEDIATE FINANCIAL MANAGEMENT SPRING 2010 1 Practice for Final Exam Multiple Choice Identify the choice that best completes the statement or answers the question. ____ 1. The City of Charleston issued $3,000,000 of 8% coupon, 30-year, semiannual payment, tax- exempt muni bonds 10 years ago. The bonds had 10 years of call protection, but now the bonds can be called if the city chooses to do so. The call premium would be 6% of the face amount. New 20-year, 6%, semiannual payment bonds can be sold at par, but flotation costs on this issue would be 2% of the amount of bonds sold. What is the net present value of the refunding? Note that cities pay no income taxes, hence taxes are not relevant. a. $453,443 b. $476,115 c. $499,921 d. $524,917 e. $551,163 ____ 2. Thompson Enterprises has $5,000,000 of bonds outstanding. Each bond has a maturity value of $1,000, an annual coupon of 12.0%, and 15 years left to maturity. The bonds can be called at any time with a premium of $50 per bond. If the bonds are called, the company must pay flotation costs of $10 per new refunding bond. Ignore tax considerations--assume that the firm's tax rate is zero. The company's decision of whether to call the bonds depends critically on the current interest rate on newly issued bonds. What is the breakeven interest rate, the rate below which it would be profitable to call in the bonds? a. 9.57% b. 10.07% c. 10.60% d. 11.16% e. 11.72% Scenario 18-1 The data below apply to the following problem(s). New York Waste (NYW) is considering refunding a $50,000,000, annual payment, 14% coupon, 30-year bond issue that was issued 5 years ago. It has been amortizing $3 million of flotation costs on these bonds over their 30-year life. The company could sell a new issue of 25-year bonds at an annual interest rate of 11.67% in today's market. A call premium of 14% would be required to retire the old bonds, and flotation costs on the new issue would amount to $3 million. NYW's marginal tax rate is 40%. The new bonds would be issued when the old bonds are called. ____ 3. Refer to Scenario 18-1. What is the required after-tax refunding investment outlay, i.e., the cash outlay at the time of the refunding? a. $5,049,939 b. $5,315,725 c. $5,595,500 d. $5,890,000
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e. $6,200,000 2 ____ 4. Refer to Scenario 18-1. What will the after-tax annual interest savings for NYW be if the refunding takes place? a. $664,050 b. $699,000 c. $768,900 d. $845,790 e. $930,369 ____ 5. Refer to Scenario 18-1. The amortization of flotation costs reduces taxes and thus provides an annual cash flow. What will the net increase or decrease in the annual flotation cost tax savings be if refunding takes place? a. $6,480 b. $7,200 c. $8,000 d. $8,800 e. $9,680 ____ 6. Refer to Scenario 18-1. What is the NPV if NYW refunds its bonds today? a. $1,746,987
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This note was uploaded on 06/11/2011 for the course FI 410 taught by Professor Staff during the Spring '08 term at Alabama.

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410_final_practice - FI410 INTERMEDIATE FINANCIAL...

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