Fabozzi Frank, Peterson Pamela. Financial Management and Analysis Workbook

Подождите немного. Документ загружается.

170 QUESTIONS AND PROBLEMS

PROBLEMS

Refer to Chapter 17, pages 571–580 in Financial Manage-

ment and Analysis.

1. Semi-Nowl Corporation has 1.1 million shares of 8%

cumulative preferred stock outstanding with a stated

value of $100 per share. If dividends are not paid for four

years, what will be the amount of arrearage?

2. Suppose you own 500 shares of FSU Inc. 12% convertible

preferred stock. If each preferred share is convertible into

25 common shares, what is the conversion value of your

5,000 preferred shares if the common stock is trading at

$30 per share?

Ch17 Page 170 Tuesday, December 16, 2003 9:12 AM

Preferred Stock 171

3. KLM Company issued $3 million of 9.75% $80 par pre-

ferred shares in 2001. Calculate the total amount of divi-

dends paid on this issue per year and the annual amount of

the dividends per share.

Ch17 Page 171 Tuesday, December 16, 2003 9:12 AM

Ch17 Page 172 Tuesday, December 16, 2003 9:12 AM

CHAPTER

173

Capital Structure

FILL IN THE BLANKS

Refer to Chapter 18, pages 583–621 in Financial Manage-

ment and Analysis.

1. The combination of ______________ and equity used to

______________ a ﬁrm’s projects is referred to as its

______________ structure. The ______________ structure

of a ﬁrm is some mix of debt, internally generated

______________, and new ______________.

2. Failure to pay ______________ or principal as promised may

result in ______________ distress. ______________ distress is

the condition where a firm makes ______________ under

pressure to satisfy its legal obligations to its ______________.

These decisions may ______________ be in the best interest

of the owners of the firm.

3. When ______________ financing is used instead of

______________, the owners don’t share the earnings, all

they must do is pay their ______________ the interest on

Ch18 Page 173 Tuesday, December 16, 2003 9:13 AM

174 QUESTIONS AND PROBLEMS

debt. But when ______________ financing is used instead

of ______________, the owners must ______________ the

increased earnings with the additional owners, diluting

their ______________ on equity and ______________ per

share.

4. We can measure the ______________ associated with

alternative forms of financing by calculating the

______________ deviation and the ______________ of

variation of the possible earnings per share. The

______________ the ______________ deviation and

______________ of variation the ______________ the risk.

5. The discount ______________ is referred to as the

______________ rate, which is the ______________ rate

that translates ______________ earnings into a current

______________. The ______________ rate reflects the

uncertainty associated with the expected earnings in the

______________. The more ______________ the future

earnings, the ______________ a dollar of future income is

worth today and the ______________ the capitalization rate.

6. The risk ______________ is the difference between the

______________ rate for the net ______________ to own-

ers and the ______________ rate on ______________ to

creditors (the ______________), which is assumed to be

risk ______________. The ______________ the use of

______________, the ______________ the ______________

premium.

Ch18 Page 174 Tuesday, December 16, 2003 9:13 AM

Capital Structure 175

7. The benefit from interest deductibility is referred to as the

interest ______________. It is equal to the ______________

tax rate times the interest ______________. An alternative

calculation is the ______________ tax rate times the

______________ rate on debt times the face ______________

of debt.

8. If a firm has deductions that ______________ income, the

result is a net ______________ loss. The firm does not have

to pay ______________ in the year of the ______________

and may carry this ______________ to another tax year.

This ______________ may be applied against

______________ years’ taxable ______________, with some

limits.

9. For firms whose owners have ______________ liability,

the more the ______________ are financed with

______________, the greater the incentive to take on

______________ projects, leaving ______________ “hold-

ing the bag” if the projects turn out to be ______________.

There is a(n) ______________ of interest between

______________ interests and ______________ interests.

10.We can classify ______________ costs into ______________

and ______________ costs. ______________ costs include

the legal, administrative, and ______________ costs asso-

ciated with the filing for bankruptcy and the administra-

tion of bankruptcy. The ______________ costs of

bankruptcy are more ______________ to evaluate.

Ch18 Page 175 Tuesday, December 16, 2003 9:13 AM

176 QUESTIONS AND PROBLEMS

SHORT ANSWER QUESTIONS

Refer to Chapter 18, pages 583–621 in Financial Manage-

ment and Analysis.

1. Why can debt ﬁnancing be more attractive than equity

ﬁnancing?

2. Why do debt ratios differ across industries? Within indus-

tries?

Ch18 Page 176 Tuesday, December 16, 2003 9:13 AM

Capital Structure 177

3. What is the leverage effect? What happens if earnings are

insufficient to cover interest payments?

4. How does the tax shield affect the value of the firm?

Ch18 Page 177 Tuesday, December 16, 2003 9:13 AM

178 QUESTIONS AND PROBLEMS

5. What is the relationship between financial distress and

capital structure? What are the factors to be considered?

6. What factors should be taken into consideration in capital

structure decisions?

Ch18 Page 178 Tuesday, December 16, 2003 9:13 AM

Capital Structure 179

PROBLEMS

Refer to Chapter 18, pages 583–621 in Financial Manage-

ment and Analysis.

1. Firm Z has $34,000 in debt and $50,000 in equity. What

is Firm Z’s debt ratio and debt-to-assets ratio? What do

the ratios mean?

2. What is the capitalization rate for equity for Firm Z in

problem 1, assuming there are no taxes and the cost of

equity is 9% and the cost of debt is 5%?

Ch18 Page 179 Tuesday, December 16, 2003 9:13 AM