When a firm refunds a debt issue, the firm’s stockholders gain and its bondholders lose.

1. When a firm refunds a debt issue, the firm’s stockholders gain and its bondholders lose. This points out the risk of a call provision to bondholders and explains why a non-callable bond will typically command a higher price than an otherwise similar callable bond.a. Trueb. False2. When a firm has risky debt, its debt can be viewed as an option on the total value of the firm with an exercise price equal to the face value of the equity.a. True.b. False3. Preferred stockholders have priority over common stockholders with respect to dividends, because dividends must be paid on preferred stock before they can be paid on common stock. However, preferred and common stockholders normally have equal priority with respect to liquidating proceeds in the event of bankruptcy.a. Trueb. False4. If investors prefer firms that retain most of their earnings, then a firm that wants to maximize its stock price should set a lower payout ratio. a. Trueb. False