11) If Trundell Co. Ltd. issued 12-year debt by way of a zero coupon (strip) bond with a nominal value of $15,000,000 and received $6,660,200 at issue, what interest rate did Trundell pay on its bond? A) 16% B) 7.0% C) 3.7% D) 4.4% E) 25% 12) ABC Corp. needs $8,000,000 of debt for a quarter share fractional ownership of a Gulfstream IV executive jet. If the company’s investment banker has offered to raise the financing by way of a zero coupon (strip) bond with a yield to maturity in 15 years of 6%, what will ABC Corporation’s total cash outflow be at maturity? A) $25.4 million B) $77.7 million C) $8.0 million D) $19.2 million E) $186.2 million 13) A company has 16 million common shares outstanding and on Dec. 31st, declared a year-end net income after tax of $48 million. It pays a fixed dividend of $1.20 on its 4.8 million preferred shares outstanding. The company’s has expanded rapidly and traded steadily at a price/earnings ratio of 32. Four years ago, it issued $42 million worth of debt at 4% compounded annually with a convertible feature that could be exercised December 31st of year 4 of the loan at a price of $84.00. If the company issues new shares to the bondholders, what is the dilution in current earnings per share if maximum conversion occurs? A) No dilution as the current market price of the share is too low for conversion to take place. B) Earning per share will drop by 8.0 cents per share after full conversion. C) No dilution as the current market price of the share is too high for conversion to take place. D) No dilution will occur as the liquidation of the loan through conversion will boost net income after tax. E) Earnings per share will drop by 9.1 cents per share after full conversion. 14) To establish the credit ratings that are used in the financial industry to represent the level of default risk associated with a bond, what do credit rating agencies do? A) Collaborate with governmental taxation and finance departments. B) Operate within the provincial securities departments. C) Assess multiple sources and institutions and work independently. D) Cooperate with national stock exchanges and investment dealers. E) Interact with the World Bank and International Monetary Fund to accurately assess all relevant risks. 15) Holdean Property Development Ltd. has been downgraded to a BB rating (below investment grade) by the major debt rating agencies. What is the immediate consequence of the reclassification? A) The company’s shareholders are demanding a higher dividend payout. B) Current bond holders are experiencing a decline in the value of the company’s bonds. C) Current bond holders are requiring and receiving a higher coupon payment on the company’s bonds. D) Holdean Property Development Ltd. has a higher weighted average cost of capital. E) Banks and financial institutions are legally empowered to step in and restructure Holdean’s debt. 16) What is the most common purpose for which junk bonds are used? A) To finance hostile takeovers. B) By investors who require an instrument that falls between debt and common shares in terms of risk and return. C) To finance reverse take-overs, where a smaller business is acquiring a larger one. D) By investors who require a high return option for portfolio diversification. E) To finance a business whose credit is below an investment grade rating. 17) What is an advantage to a business when financing through an issue of preferred shares rather than bonds? A) Preferred shares trade on stock exchanges as well as OTC (over the counter) making preferred share issues always easier to place. B) A company is legally obligated to pay interest to its bondholders. Dividends to preferred shareholders can be deferred indefinitely. C) Preferred shareholders demand a lower rate of return than bondholders. D) Dividends paid to preferred shareholders can be written off against taxes at a higher rate than interest payments to bond holders. E) Preferred shareholders demand a lower value of assets to be pledged against the capital they provide to the business than bondholders do. 18) Doreland Corp. borrowed $3.5 million seven years ago at a floating rate of 5% compounded annual with annual interest payments and principle payable in full at maturity. It also purchased, as part of the loan package, a hedge for $80,000 that limited their rate movement exposure to 2%. Two years after the loan was initiated, interest rates rose by one percent and went up a further one percent, a year later. Rates then stayed the same until 12 months before maturity when they went up by 2%. At the time Doreland took out the loan it chose not to take the alternative of a fixed rate of financing at 7% for the full term of the loan. Ignoring the time value of money, what was the net effect of Doreland’s choice of financing compared to locking in a 7% fixed rate of interest? A) Cost the company $80,000 B) Cost the company $235,000 C) Saved the company $95,000 D) Saved the company $175,000 E) Cost the company $761,158 19) AAA Ltd. has borrowed $15 million dollars at a fixed rate of 8% for seven years to purchase large industrial presses. Last year, BBB Ltd. negotiated a variable rate loan, at a similar amount, currently at 7.5%, for somewhat smaller presses with enhanced finishing features. If the two companies enter into an interest rate swap agreement, which of the following best describes the effects? A) The remainder of AAA’s $15 million is sold to BBB in exchange for an equivalent amount of BBB’s $15 million debt. B) The fixed assets purchased through the $15 million debt by AAA are exchanged for the fixed assets purchased through debt by BBB. The debt contracts do not change hands and a monetary equivalent for accumulated amortization is provided to BBB. C) The fixed assets purchased through the $15 million loan by AAA are exchanged for the fixed assets purchased through debt by BBB. The debt contracts are re-issued to the exchanging parties to reflect the change in hands of assets and financing. D) The payments and terms involved in servicing the debt of AAA are assumed by BBB in exchange for AAA taking over the payments and terms involved in servicing BBB’s debt. The debt contracts do not formally change hands and are actually serviced by the original borrowers. However, as contracted, an equalization payment is provided to the company with the net lower interest rate for the payment period. E) An informal agreement takes place where an electronic funds transfer is established between the banks of AAA and BBB. The fixed terms and repayment schedule of AAA’s debt is serviced out of BBB’s account, and AAA’s account provides the payments subject to the variable rate negotiated by BBB. This arrangement can be terminated by either party. 20) What is the value that will be entered on both sides of Atlas Asbestos Ltd.’s balance sheet if the company’s capital leasing contract calls for quarterly payments of $3,535 for five years beginning three months from now at an interest rate of 12% compounded four times year? A) $52,592 B) $94,987 C) $12,743 D) $22,457 E) $26,404