When a firm refunds a debt issue, the firm\'s stockholders gain and its bondhold

Question

When a firm refunds a debt issue, the firm's stockholders gain and its bondholders lose. This points out the risk of a call provision to bondholders and explains why a non-callable bond will typically command a higher price than an otherwise similar callable bond.

False

The cost of meeting SEC and possibly additional state reporting requirements regarding disclosure of financial information, the danger of losing control, and the possibility of an inactive market and an attendant low stock price are potential disadvantages of going public.

False

You have the following data on three stocks:

Stock Standard Deviation Beta
A 0.15 0.79
B 0.25 0.61
C 0.20 1.29

As a risk minimizer, you would choose Stock ____ if it is to be held in isolation and Stock ____ if it is to be held as part of a well-diversified portfolio.

Explanation / Answer

1. The answer is true.

Refund of debt issue cause stakeholder`s to gain and bondholders to lose. This explains why a non-callable bond will typically command a higher price than an otherwise similar callable bond.

2. The statement is true

The cost of meeting SEC and possibly additional state reporting requirements regarding disclosure of FINANCIALinformation, the danger of losing control, and the possibility of an inactive market and an attendant low stock price are potential disadvantages of going public.

3. The correct answer is C, A

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