06 May WHICH OF THE FOLLOWING IS NOT A POTENTIAL BENEFIT OF A MERGER? (
The Bowman Corporation has a $20 million bond obligation outstanding, which it is considering refunding.
Though the bonds were initially issued at 12 percent, the interest rates on similar issues have declinedto 10.5 percent. The bonds were originally issued for 20 years and have 15 years remaining. The new issuewould be for 15 years. There is an 8 percent call premium on the old issue. The underwriting cost on the new $20 million issue is $570,000, and the underwriting cost on the old issue was $400,000. The company is in a 35 percent tax bracket, and it will use a 7 percent discount rate (rounded after-tax cost of debt) to analyze the refunding decision.
Should the old issue be refunded with new debt?
Problem 20 B
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%. The firm will use the three year MACRS depreciation category(with the associated 4-year write off). Assume a tax rate of 35%
a. Compute the aftertax cost of the lease for 4 years.
b. Compute the annual payment for the loan.
c.Compute the amortization schedule for the loan.
d. Determine the depreciation schedule.
e. Compute the after tax cost of borrow-purchase alternative.
f.Compute the present value of the aftertax cost of the two alternatives. Use a discount rate of 8%
g.Which alternative should be selected, based on miimizing the present value of aftertax costs?
1. Which of the following is not a potential benefit of a merger? (Points : 5)
Improved Financing Posture
Portfolio Effect
Dilution of Earnings Per Share
Tax Loss Carryforward
2. The Haavelmo Widget Corporation has just signed a 60-month lease on an asset with a 6-year life. The lessor will retain the property at the end of the lease, and the present value of the minimum lease payments is $470,000. The estimated fair value of the property is $600,000. Is this an operating lease? (Points : 5)
no
yes
if the company elects to treat the lease as an operating lease
more information is required
3. An example of a horizontal merger would be: (Points : 5)
Pepsi and Sears.
McDonalds and Pillsbury.
Pepsi and Frito Lay.
Coca Cola and Dr. Pepper.
4. Which of the following are advantages of leasing? (Points : 5)
A lease obligation may be substantially less restrictive than the provisions of a bond indenture.
There may be no down payment as in a purchase.
The negative effects of obsolescence may be eliminated.
All of these.
5. A serial bond repayment plan involves a: (Points : 5)
lump-sum payment at maturity.
conversion of debt to common stock.
an early redemption of all debt.
series of installments to retire the debt over the life of the issue.
6. An indenture is: (Points : 5)
the section of a corporation’s bylaws pertaining to bond issues.
the summary of the essential features of a stock issue.
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