Question 23 A firm issues $1m of new debt with a coupon interest rate of 12% and

Question

Question 23

A firm issues $1m of new debt with a coupon interest rate of 12% and uses the money to repurchase some of their own outstanding shares of common stock. Total assets is unchanged, only the mixture of debt and equity is affected. Which of the following statements must be correct? Assume no other changes.

the firm's TIE will decrease

the firm's ROA will decrease

the firm's ROE will decrease

both statements (a) and (b) are correct

statements (a), (b) and (c) are all correct.

4 points   

Question 24

A firm's bond rating changes from BBB to AAA (they are now considered to be less risky). Which of the following is a likely explanation? 1. The firm's TIE changes from 2.0 to 11.0; 2. The firm's DSO changes from 20 to 40; 3. The firm's BEP (BEP=EBIT/TA) changes from 2% to 15%

1 only

2 only

3 only

1 and 2 only

1 and 3 only

4 points   

Question 25

Which of the following is an advantage of using new common stock financing compared to new debt financing?

The cost of issuing (the floatation costs) are less for the common stock.

New equity financing will not cause any dilution of ownership of the existing shareholders.

New equity financing does not add any legal financial obligations to the firm.

Issuing new shares of common stock will increase the firm's financial leverage (result in larger EM).

the firm's TIE will decrease

the firm's ROA will decrease

the firm's ROE will decrease

both statements (a) and (b) are correct

statements (a), (b) and (c) are all correct.

Explanation / Answer

the firm's TIE will decrease

1 and 2 only

New equity financing does not add any legal financial obligations to the firm

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