B.4.1. Joint Products Inc., a corporation with a 40% marginal tax rate, plans to issue $1,000,000 of 8% preferred stock in exchange for $1,000,000 of its 8% bonds currently outstanding. The firms total liabilities and equity are equal to $......
B.4.1. Joint Products Inc., a corporation with a 40% marginal tax rate, plans to issue $1,000,000 of 8% preferred stock in exchange for $1,000,000 of its 8% bonds currently outstanding. The firm’s total liabilities and equity are equal to $10,000,000. The effect of this exchange on the firm’s weighted average cost of capital is likely to be
A. no change, since it involves equal amounts of capital in the exchange and both instruments have the same rate.
B. a decrease, since a portion of the debt payments are tax deductible.
C. a decrease, since preferred stock payments do not need to be made each year, whereas debt payments must be made.
D. an increase, since a portion of the debt payments are tax deductible.
B.4.2. Which of the following, when considered individually, would generally have the effect of increasing a firm’s cost of capital?
I. The firm reduces its operating leverage.
II. The corporate tax rate is increased.
III. The firm pays off its only outstanding debt.
IV. The Treasury Bond yield increases.
A. A. I and III.
B. B. II and IV.
C. C. III and IV.
D. D. I, III and IV.
B.5.1. Odyssey Toys is a retailer operating in several cities. The individual store managers deposit daily collections at a local bank in a non-bearing checking account. Twice per week, the local bank issues a depository transfer check (DTC) to the central bank at headquarters. The controller of the company is considering using a wire transfer. The additional cost of each transfer would be $25; collection would be accelerated by 2 days; and the annual interest rate paid by the central bank is 7.2%. At what amount of dollars transferred would it be economically feasible to use a wire transfer instead of the DTC? Assume a 360-day year
A. It would never be economically feasible
B. $125,000 or above
C. Any amount greater than $173
D. Any amount greater than $62,500
B.5.2. Some managers express the opinion that their cash management problems are nothing more than inventory problems. They then proceed to use cash management models, such as the EOQ model, to determine the:
A. Credit and collection policies
B. Marketable securities level
C. Proper relationship between current assets and current liabilities
D. Proper blend of marketable securities and cash