Exam 12: Non-Current Financial Liabilities

Bank Buy Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below: Requirements a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE ~ net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (I - tax rate).) b.Which proposal will generate the higher estimated ROE? c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?

What are "secured bonds"?

Which statement is not correct about offsetting?

Compare and contrast the two methods for amortizing the discount/premium. Interest expense in the first period is higher under which method for bonds sold at a discount? For bonds sold at a premium? Why does IFRS require public companies to use the effective interest method? Why do the Accounting Standards for Private Enterprises allow companies to use the straight-line method?

What are positive and negative covenants? Give an example of a positive and negative covenant.

Which statement is not true for a partial derecognition-say 30%-of a financial liability?

On May 5,2015,Bennix sold $1,000,000 of five-year,3% bonds for $900,500. From the proceeds,the company paid fees of 100,000.Interest is payable semi-annually on May 5 and November 5.What is the effective rate of interest to 2 decimal places?

When will bonds sell at a discount?

Which statement is correct about offsetting?

On April 15,2014,Cando Inc.sold $10,000,000 of five-year,3% bonds for $9,972,469. From the proceeds,Cando paid its investment bank a $200,000 sales commission. Interest is payable semi-annually on April 15 and October 15.What is the effective rate of interest?

Which statement is not correct about financial leverage for a $300,000 investment versus a $100,000 investment?

What is "firm commitment" underwriting?

Explain what real-return bonds,convertible bonds and perpetual bonds.

Which statement is correct about financial leverage?

Fast Track Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below: Requirements: a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE ~ net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (I - tax rate).) b.Which proposal will generate the higher estimated ROE?

Stay Fit for Life Inc.issues three series of $10,000,000 ten-year bonds dated January 1,2011 on the issue date.Interest is payable on June 30 and December 31 each year.Series A has a coupon rate of 7%; series B is 8%; and series C is 11 %.The market rate of interest at time of issue is 8%. Requirement: a.Prior to making any numerical calculations,comment on whether: i.Series A will sell at a discount,par,or premium and briefly explain why. b.Prepare journal entries to record the issuance of: i.The series A bonds.

On November 1,2012,FastCare sold $5,000,000 of three-year bonds for $4,750,325. From the proceeds,the company paid accounting fees of 50,000.Interest of 5% is payable annually.What is the effective rate of interest to 2 decimal places?

Blue Corp is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below: Requirements a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE ~ net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (I - tax rate).) b.Which proposal will generate the higher estimated ROE? c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?

On May 1,2014,SBC INC.buys a photocopier listed for $2,600.The office supply store agrees to accept a $800 down payment and a $2,100,three-year note payable at $798 per year including interest at 7%.The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities.At what amount will the photocopier be recorded at in the accounting records?

Arlington Corp issued $7,000,000,5% 4-year bonds on January I,2011 at par.Interest is due annually on December 31.The market rate of interest has since increased dramatically to 9%.As such,Arlington can repurchase its bonds on the open market for $6,507,449.They decided to take advantage of this situation,and on January 1,2013 issued a new series of bonds in the amount of $6,507,449 [two-year bonds,9% interest payable annually].The bonds were sold at par and the proceeds were used to retire the 5% bonds. Entry for sale of new bonds Arlington has recorded a gain on the retirement which increases its net income for the year.Ignoring transaction costs and taxation effects,is Arlington any better off? Discuss.