A) If a debt is subordinated, it:

Multiple Choice

1. has a higher priority status than secured creditors.

2. is secondary to equity.

3. must give preference to the secured creditors in the event of default.

4. has been issued because the company is in default.

5. is treated as an equity security.

B) Which one of these is a positive covenant?

Multiple Choice

1. The firm must maintain a current ratio of 1.2 or better.

2. The firm will not issue any debt with higher seniority.

3. The firm cannot be acquired in a friendly takeover.

4. No dividend increases will be allowed.

5. The market debt-equity ratio cannot exceed .60.

C) ABC owns 15 percent of XYZ Corporation. What tax benefit does ABC derive from this situation?

Multiple Choice

1. ABC receives no tax benefit but XYZ is only taxed on 30 percent of its net income.

2. ABC benefits because it is able to treat any XYZ dividends it receives as interest income.

3. Fifty percent of the dividends paid by XYZ to ABC is exempt from income taxes.

4. ABC can exclude 30 percent of any XYZ dividends received from its taxable income.

5. All dividend income ABC receives from XYZ is tax-exempt.

D) Which characteristic does not apply to Eurobonds?

Multiple Choice

• Commonly traded from London

• Always denominated in euros

• Always denominated in a single currency

• Generally denominated in the issuer's home currency

• Issued in multiple countries