A Firm Agrees to Accept Payments on a $1,000,000 Loan

question 101

Multiple Choice

A firm agrees to accept payments on a $1,000,000 loan with a fixed interest rate of 8% in exchange for making the payments on a loan with floating rate payments based on LIBOR.Payments are interest only with principal due in 10 years.The firm will benefit

• A)if LIBOR falls.
• B)if LIBOR rises.
• C)if Libor remains unchanged.
• D)if LIBOR fluctuates randomly.

Recognize the implications of the static theory of capital structure for firm valuation and optimal capital structure.

Identify and define the key components and consequences of financial restructuring, liquidation, and reorganization for distressed firms.

Distinguish between business risk and financial risk and their sources.

Understand the effects of financial leverage on WACC and the firm's cost of equity.

---

Definitions:

Net Credit Sales

The total amount of sales made on credit, subtracting returns and allowances.

Accounts Receivable

Money owed to a company by its customers for goods or services that have been delivered or used but not yet paid for.

Times Interest Earned Ratio

The times interest earned ratio is a financial metric that measures a company's ability to meet its debt obligations based on its current earnings before interest and taxes (EBIT).

Default in Payment

Occurs when a borrower fails to make a loan payment on time as agreed upon in the loan agreement.