1. Baker Industries has two forms of debt outstanding. The first is $175,000 of debt secured by a mortgage on the firm's equipment. The second debt is a $120,000 debenture. Assume that the firm declares bankruptcy and is liquidated. The equipment is sold for $181,000 cash and the remaining assets are converted into $86,000 of cash. Which one of the following statements is true given this information? Ignore all bankruptcy costs and other claims.
a) The holders of the mortgaged debt will receive $175,000 / ($175,000 + $120,000) of the total $267,000 of cash
b) The holders of the mortgaged debt will receive $175,000.
c) The holders of the debenture will receive $86,000.
d) The holders of the debenture will receive $120,000.
2. The spot exchange rate between the dollar and the British pound is floating or flexible. What are the effects of each of the following events on this exchange rate?
a) There is a large increase in British demand for US exports.
b) There is a large increase in British demand for investments in US$-denominated financial assets.
c) Political uncertainties in Europe have lead US investors to shift their financial investments out of Britain and back into the US.
d) US demand for products imported from Britain falls significantly as bad press reports lead Americans to questions the quality of British products.
e) Output of US increases temporarily.
f) Interest rate of the UK falls temporarily