Exam 3: Analyzing Financing Activities

Investing in equity is considered to be more risky than investing in bonds.

If a company increases its discount rate for the purposes of calculating its pension obligations, the accumulated benefit obligation and the projected benefit obligation will both decrease.

Dylan Corporation issues a zero coupon bond with $100,000 face value, with a 5-year maturity, and the market rate is 7%. Interest on corporate bonds is normally paid semiannually. In the liability section of Dylan's balance sheet, the proceeds from selling the zero-coupon immediately after issuance will be closest to:

Evaluating risk of long-term creditors (e.g. bondholders) involves more detail than evaluating the risk of equity holders.

Below is part of Harnischfeger's footnote on Postretirement Benefits other than Pensions from its X6 Annual report. (in thousands) Accumulated postretirement benefit obligation (APBO) \ 69,439 \ 78,800 Plan assets at fair value APBO in excess of plan assets 69,439 78,800 Unrecognized prior service credit 20,653 31,433 Unrecognized gain Accrued postretirement benefit liability Less: Current portion 18,492 16,501 $\begin{array}{lrr}\text { (in thousands) }&\underline{X 6}&\underline{X 5}\\\text { Service cost } & \$ 327 & \$ 502 \\\text { Interest cost on APBO } & 5,623 & 6,475 \\\text { Amortization of prior service (credit) } & (10,780) & (9,417) \\\text { Net amortization and deferral } &\underline{ (2,624)} &\underline{ (225)} \\ \text { Net periodic postretirement benefit cost } &\underline{\underline{ \$(7,454)}} &\underline{\underline{ \$(2,665)}}\end{array}$ a. What amount is Harnischfeger showing as a liability on their balance sheet with respect to postretirement benefits other than pensions at the end of fiscal X6? b. What amount is Harnischfeger showing as an expense on the income statement for the fiscal year X6? c. Why is Harnischfeger's accrued postretirement benefit liability greater than the APBO? d. If Harnischfeger wanted to reduce its APBO how might they do it? Provide three ways.

An analyst should consider whether a company acquired assets through a capital lease or an operating lease because a company may structure:

An SPE investor may secure its investment with a guarantee so that the SPE remains unconsolidated.

Actuarial gain or loss is the change in PBO that occurs when one or more actuarial assumptions are revised in estimating PBO.

A lessee must account for a lease as a capital lease if: I. lease transfers ownership to lessee at the end of the lease. II. lease contains option to purchase the asset at the end of the lease at a bargain price. III. lease is longer than 20 years. IV. present value of lease is greater than 10% of lessee's assets.

You are considering purchasing a company. You are aware that sometimes liabilities do not always show up on the balance sheet. Give five examples of liabilities that may not be explicitly recognized on the balance sheet, being sure to explain why they are liabilities.

Which of the following lease provisions would cause a lease to be classified as an operating lease?

Hert Corporation acquired a capital lease that is carried on its books at a present value of $100,000 (discounted at 12%). Its annual rental payment is $15,000. What is the amount of interest expense from this lease? A. \ 12,000 \ 10,200 B. \ 12,000 \ 11,640 C. \ 12,000 \ 12,350 D. \ 15,000 \ 15,000

Three elements of pension expense for defined benefit plans are: service cost, interest cost, and actual return on plan assets.

Compare the effects of operating leases as compared to capitalized leases, in the first year of a lease, on the following items listed. Explain your answer. 1. EBIT 2. Net income 3. Return on assets (levered) $\text { Levered } R O A=\frac{N I}{\text { Average Total Assets }}$ 4. Cash flow from operations 5. Current ratio

Pension intensity of a company can be measured by expressing the pension plan assets and the pension obligation separately as:

If a company increases its expected return on plan assets this year, the effect would be to: I. increase plan assets. II. decrease PBO. III. decrease pension expense. IV. decrease minimum liability.

One reason many companies do not fund their postretirement obligations other than pensions is because they are not required to do so by law.

Which of the following is true concerning bond covenants?

A company will record a contingent gain if the gain is probable and reasonably estimable.

Which of the following would be found listed as a liability on a company's balance sheet?