Chapter 9 Quiz

A  Interest is tax deductible.

B  The ownership interest of current stockholders is unchanged.

C  The cost of borrowing may be lower than the return on equity.

D  Debt financing often has no maturity date.

A  Its mixture of paid-in capital versus retained earnings.

B  Its mixture of current versus long-term assets.

C  Its mixture of liabilities and stockholders’ equity.

D  Its mixture of current versus long-term liabilities.

A  Assuming more debt is always good for the company.

B  Assuming more debt reduces leverage.

C  Assuming more debt is always bad for the company.

D  Assuming more debt can be good for the company as long as they earn a return in excess of the rate charged on the borrowed funds.

A  Matures in installments.

B  Supported by specific assets pledged as collateral by the issuer.

C  Matures on a single date.

D  Secured only by the “full faith and credit” of the issuing corporation.

A  Remain unchanged.

B  Decrease.

C  The effect cannot be determined from the information given.

D  Increase.

A  A premium.

B  A discount.

C  A discount or premium depending on the maturity date.

D  Face amount.

A  Both decrease.

B  Both increase.

C  Carrying value will decrease and interest expense will increase.

D  Carrying value will increase and interest expense will decrease.

A  Equal to cash interest paid.

B  Higher than cash interest paid.

C  Lower or higher depending on current market interest rates.

D  Lower than cash interest paid.

A  Secured and serial.

B  Unsecured and term.

C  Secured and term.

D  Unsecured and serial.

A  Gain of $14 million.

B  Gain of $2 million.

C  Loss of $2 million.

D  Gain of $16 million.

A  Notes payable.

B  Leases.

C    

D  Bonds.

E  Accounts payable.

A    

B  Issued at face value.

C  Issued above face value.

D  Riskier bonds sold at a bargain price.

E  Issued below face value.

A  $2,542

B  $2,555

C  $3,042

D  $2,529

A  Provide potential benefits to the investor.

B  Provide no potential benefits.

C  Provide potential benefits to the issuer.

D  Provide potential benefits to both the issuer and the investor.

A  A debit of $5 million to loss on early extinguishment.

B  A credit of $5 million to gain on early extinguishment.

C  No gain or loss on retirement.

D  A debit to cash for $47 million.

A  Carrying value times the market interest rate.

B  Face amount times the market interest rate.

C  Carrying value times the stated interest rate.

D  Face amount times the stated interest rate.

A  The debt to equity ratio.

B  The return on assets ratio.

C  The times interest earned ratio.

D  The return on equity ratio.

A  Provide potential benefits only to the lender.

B  Provide potential benefits to both the lender and the borrower.

C  Provide potential benefits only to the borrower.

D  Provide no potential benefits.

A  The amount that goes to interest expense increases.

B  The amount that goes to interest expense decreases.

C  The amount that goes to interest expense is unchanged.

D  The amounts paid for both interest and principal increase proportionately.

A  $6,000

B  $500

C  $3,042

D  $2,542

A  Above face amount.

B  At face amount.

C  Above or below face value depending on current market interest rates.

D  Below face amount.

A  The bond’s face amount to be paid at maturity.

B  The present value of the bond’s face amount plus the present value of its periodic interest payments.

C  The present value of the bond’s face amount to be paid at maturity.

D  The present value of the bond’s periodic interest payments over the life of the bond.

A  $513

B  $487

C  $500

D  $6,000

A  Record a lease for the present value of the 24 lease payments.

B  Record a lease liability.

C  Record a lease asset.

D  Record a lease for the present value of the 24 lease payments, Record a lease liability and Record a lease asset.

A  An implied rate based on the price investors pay to purchase a bond in return for the right to receive the face amount at maturity and periodic interest payments over the remaining life of the bond.

B  The rate specified in the bond contract used to calculate the cash payments for interest.

C  A government-issued rate based on general economic conditions.

D  The amount of principal to be returned to the bondholder at the maturity date.

A  $2,542

B  $500

C  $6,000

D  $3,042

A  Lease payments are tax deductible while depreciation on a purchased asset is not.

B  Leased assets are more likely to generate additional profits than are purchased assets.

C  Leases are not reported as liabilities in the balance sheet.

D  Leases typically require less cash upfront to begin using the asset.

A  Issued at face value.

B  Issued above face value.

C  Issued below face value.

D  Riskier bonds sold at a bargain price.

A  Carrying value increases and interest expense decreases.

B  Carrying value and interest expense decrease

C  Carrying value and interest expense remain unchanged.

D  Carrying value and interest expense increase.

A  Stay the same.

B  Increase.

C  Decrease.

D  Depend on the current market interest rate.