1. You have been asked to classify a security as debt or equity and have been provided the following characteristics for the security: It requires fixed monthly payments that are tax-deductible, and it has an infinite life. Its claims on the cash flows of the firm, during operation, and on the assets, if the firm goes bankrupt, come after all debt holders claims (including unsecured debt) are met.

a. it is debt.

b. It is equity.

c. It is a hybrid security.

Explain

2. Companies in Europe and emerging markets have historically depended on bank debt to borrow and have had limited access to corporate bond markets. In recent years, their access to corporate bond markets, both domestically and internationally, has increased. As a result, which of the following would you expect to happen to debt ratios in these countries?

a. Debt ratios should go up.

b. Debt ratios should go down.

c. Debt ratios should not change much.

Explain

3. You have been asked to assess the after-tax cost of debt for a firm that has $2 billion in net operating losses to carryforward and operating income of roughly $2 billion this year. If the company can borrow at 8% and the marginal corporate tax rate is 40%, the after-tax cost of debt this year is

a. 8%

b. 4.8%

What would your after-tax cost of debt be next year?

4. You are reading the Wall Street Journal and notice a tombstone ad for a company offering to sell convertible preferred stock. What would you hypothesize about the health of the company issuing these securities?

a. Nothing

b. Healthier than the average firm

c. In much more financial trouble than the average firm

Explain