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Chapter 5: 13DQ (page 524)

Explain how the bond refunding problem is similar to a capital budgeting decision. (LO16-3)

Short Answer

Expert verified

The bond refunding and capital budgeting decisions are similar because both focus on the outflow of financial costs and inflow of savings.

Step by step solution

01

Capital budgeting decision 

Capital budgeting decisions are associated with the investments and financial commitment made by the corporations. It facilitates the business to decide its long-term projects.

02

Relationship between bond refunding and capital budgeting

Bond refunding is when a corporation redeems its existing high-rated interest bonds and re-issues such bonds at lower interest rates.

Bond refunding is similar to capital budgeting because both matters consider the outflows of financing costs and represent inflows as tax and cost savings.

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Most popular questions from this chapter

The Hardaway Corporation plans to lease a \(740,000 asset to the O’Neil Corporation. The lease will be for 11 years.

b. If the Hardaway Corporation is able to take a 10 percent deduction from the purchase price of \)740,000 and will pass the benefits along to the O’Neil Corporation in the form of lower lease payments, (related to the Hardaway Corporation in the form of lower initial net cost), how much should the revised lease payments be? The Hardaway Corporation desires a 13 percent return on the 11-year lease

The Hamilton Corporation Company has 4 million shares of stock outstanding and will report earnings of \(6,910,000 in the current year. The company is considering the issuance of 1 million additional shares that can only be issued at \)30 per share.

a. Assume that Hamilton Corporation Company can earn 7.0 percent on the proceeds. Calculate the earnings per share.

b. Should the new issue be undertaken based on earnings per share?

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a. The coupon rate.

b. The current rate.

c. The yield to maturity

What are three forms of corporate securities discussed in the chapter?

Corporate debt has been expanding very dramatically in the last three decades. What has been the impact on interest coverage, particularly since 1977? (LO16-1)
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