BFC1001 Quiz: BFC1001 - W1 - What is Finance
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The Landers Corporation needs to raise $1.50 million of debt on a 10-year issue. If it places the bonds privately, the interest rate will be 12 percent. Thirty five thousand dollars in out-of-pocket costs will be incurred. For a public issue, the interest rate will be 9 percent, and the underwriting spread will be 4 percent. There will be $130,000 in out-of-pocket costs. Assume interest on the debt is paid semiannually, and the debt will be outstanding for the full 10-year period, at which time it will be repaid. Use Appendix B and Appendix D for an approximate answer but calculate your final answer using the formula and financial calculator methods. |
a. | For each plan, compare the net amount of funds initially availableâinflowâto the present value of future payments of interest and principal to determine net present value. Assume the stated discount rate is 16 percent annually. Use 8.00 percent semiannually throughout the analysis. (Disregard taxes.) (Assume the $1.50 million needed includes the underwriting costs. Input your present value of future payments answers as negative values. Do not round intermediate calculations and round your answers to 2 decimal places.) |
Private Placement | Public Issue | |
Net amount to Landers | $ | $ |
Present value of future payments | ||
Net present value | $ | $ |
b. | Which plan offers the higher net present value? | ||||
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1. When is a standard capital budgeting project acceptable?
A. When the NPV is positive and the IRR is below the required rate of return.
B. When the NPV is negative and the IRR is below the required rate of return.
C. When the NPV is positive and the IRR is greater than the required rate of return.
2. After GM filed for Chapter 11 bankruptcy, all of its common stocks had been removed from NYSE. Since then, there was no GM stock trading in any of the major stock exchange. The big event for GM in November 2011 was to list the new stocks in NYSE. This is an example of _________.
A. | Seasoned offering | |
B. | Unseasoned offering | |
C. | Private placement | |
D. | Underwriting |
D. When the NPV is zero and the IRR is greater than the required rate of return.