Exam 3: Analyzing Financing Activities

With a defined contribution plan the risk of pension fund performance rests with the employees/retirees of the company, while with a defined benefit plan this risk rests with the company.

Werter Inc. has a defined benefit pension plan. Information related to this plan as of the end of 2006 is as follows: PBO \ 5,350,000 ABO 4,100,000 Plan Assets 3,500,000 Unamortized Prior Service Cost 360,000 Unamortized transition asset 540,000 Discount rate 8\% Compensation rate increase 5\% Expected rate of return 10\% a. Estimate pension expense for 2006 assuming that the pension plan assumptions remain unchanged from 2006, service cost is 10% of beginning of year PBO and that the prior service costs and transition assets are being amortized over 20 years. b. Calculate the liability to be recorded in the balance sheet at the end of fiscal 2006.

Minority interest appears on the balance sheet of some companies. Minority interest:

Some financial information about Retail Inc. and Store Inc. is given below: Retail Inc. Store Inc. As of year-end X1 Current liabilities \ 3,251 \ 1,542 Long-term debt 4,572 2,134 Other long-term liabilities 783 560 Shareholders' equity 3,145 1,837 Total Minimum payments under operating leases Year X2 712 487 Year X3 682 443 Year X4 667 371 Year X5 629 325 Year X6 542 312 After year X6 1,543 872 Total You are asked to analyze these companies and specifically analyze the impact of the leases on different financial ratios. a. Compute the present value of the lease obligations for Retail Inc. using an annual interest rate of 8%. You should assume all payments are made at the end of the year, and all payments after year X6 are equal to the payment in year X6. b. Compute the present value of the lease obligations for Stores Inc. using an annual interest rate of 8%. You should assume all payments are made at the end of the year, and all payments after year X6 are equal to the payment in year X6. c. Compute the total liabilities to asset ratio and the long-term debt to assets ratio for Retail Inc. for the end of year X1. d. Compute the total liabilities to asset ratio and the long-term debt to assets ratio for Stores Inc. for the end of year X1. e. Repeat c and d and compute the total liabilities to asset ratio and the long-term debt to assets ratio for both companies for the end of year X1 assuming the companies capitalize the leases.

Following recent SPE abuses, a new rule requiring a minimum of 3% external financing was enacted.

The majority of financing for most companies comes from which of the following sources?

Funding of pension plans is required by GAAP.

Which of the following is not a component of recognized OPEB cost?

One way for a company to increase its book value per share is to:

The following information was taken from Wicom's financial statements as of December 31, 2006. Preferred stock - 100,000 shares authorized, issued and \ 1,000,000 outstanding; \ 10 par value; \ 11 liquidation value Common stock, par value \ 0.50 . Authorized 230,000 1,000,000 shares; issued - 460,000 shares Capital contributed in excess of par value 4,750,000 Retained earnings (500,000) Treasury stock, at cost ( 50,000 shares) (500,000) Total stockholders' equity \ 4,980,000 a. Calculate book value per share of common stock. b. Assume that the company also had $1,000,000 worth of convertible bonds. The bonds are convertible at one $1,000 bond into 150 shares of stock. There are also stock options to buy 120,000 shares at a price of $5 per share. The stock is currently trading at $30 per share. Recalculate your answer to part a) taking into account dilutive effects of the above.

If a company that leases equipment from another company records these leases as operating leases rather than capital leases, its: I. recorded liabilities will be lower. II. recorded assets will be higher. III. total cash flows will be higher. IV. leverage ratios will be higher.

Reling Company reports the following information as of 12/31/05 10 \% cumulative preferred stock, par value \ 10 and liquidation value \ 11;20,000 shares authorized and issued: 10,000 shares outstanding \ 100,000 Common stock - authorized 50,000 and 40,000 outstanding; \ 1 par value \ 40,000 Additional paid-in capital \ 350,000 Retained earnings \ 230,000 -The book value per share of preferred stock is:

Treasury stock is:

With respect to pension liabilities, which of the following statements is true? I. The projected benefit obligation (PBO) is always greater than or equal to the accumulated benefit obligation (ABO). II. The vested benefit obligation (VBO) is always as least as or as big as the accumulated benefit obligation (ABO). III. If the PBO is greater than the plan assets, the plan is said to be overfunded. IV. If the weighted-average assumed discount rate is increased, the PBO will decrease.

When analyzing postretirement benefits, one should evaluate the actuarial assumptions and their effects on the financial statements.

Pension accounting for defined benefit plans requires that retroactive adjustments to the plan (prior service costs) be recognized immediately in full in the pension expense.

If a company engages in off-balance sheet financing, generally the effect is: I. to cause assets to be understated. II. to increase leverage ratios. III. to increase cash flows. IV. to cause liabilities to be understated.

When considering defined benefit pension plans, which of the following will not increase the projected benefit obligation (PBO)?

A convertible bond is an equity investment, which is convertible into bonds at the option of the owner of the convertible bond.

Stockholders are the residual claimants of a company.