FIN 540 Homework Chapter 18

Directions: Answer the following five questions on a separate document. Explain how you reached the
answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using
the assignment link in the course shell. Each question is worth five points apiece for a total of 25 points
for this homework assignment.
1. Which of the following is generally NOT true and an advantage of going public?
a. Increases the liquidity of the firm's stock.
b. Makes it easier to obtain new equity capital.
c. Establishes a market value for the firm.
d. Makes it easier for owner-managers to engage in profitable self-dealings.
e. Facilitates stockholder diversification.
2. Which of the following statements about listing on a stock exchange is most CORRECT?
a. Any firm can be listed on the NYSE as long as it pays the listing fee.
b. Listing provides a company with some "free" advertising, and it may enhance the firm's
prestige and help it do more business.
c. Listing reduces the reporting requirements for firms, because listed firms file reports with
the exchange rather than with the SEC.
d. The OTC is the second largest market for listed stock, and it is exceeded only by the
NYSE.
e. Listing is a decision of more significance to a firm than going public.
3. Which of the following statements is most CORRECT?
a. Private placements occur most frequently with stocks, but bonds can also be sold in a
private placement.
b. Private placements are convenient for issuers, but the convenience is offset by higher
flotation costs.
c. The SEC requires that all private placements be handled by a registered investment
banker.
d. Private placements can generally bring in funds faster than is the case with public
offerings.
e. In a private placement, securities are sold to private (individual) investors rather than to
institutions.

4. Which of the following statements is most CORRECT?
a. The key benefits associated with refunding debt are the reduction in the firm's debt ratio
and the creation of more reserve borrowing capacity.
b. The mechanics of finding the NPV of a refunding decision are fairly straightforward.
However, the decision of when to refund is not always clear because it requires a
forecast of future interest rates.
c. If a firm with a positive NPV refunding project delays refunding and interest rates rise, the
firm can still obtain the entire NPV by locking in a low coupon rate when the rates are
low, even though it actually refunds the debt after rates have risen.
d. Suppose a firm is considering refunding and interest rates rise during time when the
analysis is being done. The rise in rates would tend to lower the expected price of the
new bonds, which would make them cheaper to the firm and thus increase the expected
interest savings.
e. If new debt is used to refund old debt, the correct discount rate to use in the refunding
analysis is the before-tax cost of new debt.
5. Which of the following factors would increase the likelihood that a company would call its
outstanding bonds at this time?
a. A provision in the bond indenture lowers the call price on specific dates, and yesterday
was one of those dates.
b. The flotation costs associated with issuing new bonds rise.
c. The firm's CFO believes that interest rates are likely to decline in the future.
d. The firm's CFO believes that corporate tax rates are likely to be increased in the future.
e. The yield to maturity on the company's outstanding bonds increases due to a weakening
of the firm's financial situation.