A Corporation Undertaking an Expansion Project Issues 20 Year Bonds

question 276

Multiple Choice

A corporation undertaking an expansion project issues 20 year bonds to finance the project. Which of the following is most likely true?

• A) The company does not need to make payments on the bonds unless it has positive earnings for the year.
• B) The company has borrowed money and must pay interest on the amount borrowed.
• C) The company did not have any outstanding bonds when it issued the new bonds.
• D) The bonds must have sold at a premium since expansion projects are generally risky.
• E) If the company could have issued preferred stock instead, they would have.

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Definitions:

Lease Financing

A method of funding for acquiring assets, where the item is leased rather than purchased outright, often with an option to buy at the end.

Cash Payment

A transaction in which the payment for goods or services is made in cash at the time of purchase.

Debt Financing

A method of funding where a company raises capital through borrowing, typically from institutional sources or by issuing bonds.

Return On Equity

A measure of financial performance calculated by dividing net income by shareholders' equity, indicating how efficiently a company uses investments to generate earnings growth.