Chapter 5: 3DQ (page 524)
What is the difference between a bond agreement and a bond indenture? (LO16-1)
A corporate bond agreement describes the basic terms linked with a bond; in comparison, a bond indenture covers each detail related to the issuance of the bond.
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Explain how the bond refunding problem is similar to a capital budgeting decision. (LO16-3)
The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.
Assets | ||
Book value | Liquidation value | |
Accounts receivables | \(1,400,000 | \)1,200,000 |
Inventory | \(1,800,000 | \)900,000 |
Machinery and equipment | \(1,100,000 | \)600,000 |
Building and plant | \(4,200,000 | \)2,500,000 |
Total assets | \(8,500,000 | \)5,200,000 |
Liabilities and stockholder’s claims | |
Liabilities | |
Accounts payable | \(2,800,000 |
First lien, secured by machinery and equipment | \)900,000 |
Senior unsecured debt | \(2,200,000 |
Subordinated debenture | \)1,700,000 |
Total liabilities | \(7,600,000 |
Stockholder’s claims | |
Preferred stock | \)250,000 |
Common stock | \(650,000 |
Total stockholder’s claims | \)900,000 |
Total liabilities and stockholder’s claims | $8,500,000 |
d. After the machinery and equipment are sold to partially cover the first lien secured claim, how much will be available from the remaining asset liquidation values to cover unsatisfied secured claims and unsecured debt?
Do corporations rely more on external or internal funds as sources of financing?
Explain how the zero-coupon rate bond provides return to the investor. What are the advantages to the corporation? (LO16-2)
What was the purpose of the Sarbanes-Oxley Act of 2002?
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