Exam 3: Analyzing Financing Activities

Operating leases can inflate both return on investment and asset turnover ratios.

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? First Year Second Year A) 12,000 10,200 B) 12,000 11,640 C) 12,000 12,350 D) 15,000 15,000

If a company issues new stock, this will always decrease book value per share.

An analyst should treat preferred stock on a firm's balance sheet as debt when calculating leverage ratios if the preferred stock is convertible into common stock.

Pension risk arises to the extent to which plan assets have a different risk profile than the pension obligation.

An increase in the pension obligation because of passage of time is referred to as the interest cost.

Which of the following statements concerning contingencies is correct? I. Gain contingencies are recorded if they are probable and reasonably estimable. II. Unredeemed frequent flyer mileage is an example of a loss contingency. III. A loss contingency is a form of off-balance sheet financing. IV. Loss contingencies are not recognized unless there is a greater than 95% chance they will be realized.

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.

Which one of the following statements is false?

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

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

Reling Company reports the following information as of 12/31/05 10 \% cumulative preferred stock, par value\ 10 and liquidation value \ 11 ; 20,000shares authorized and issued: \1 0.000 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:

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

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

If the lease term is 75% or more of the economic life of the asset, the lease needs to be classified as a capital lease.

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

Current liabilities should always be expected to be liquidated within one year.

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.

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

Pawn Company's 2006 Annual Report included the following information about its defined benefit pension plan: Plan Status: December 31, 2006 Accumulated Benefit Obligation \ 20 Million Projected Benefit Obligation \ 25 Million Plan Assets (at fair value) \ 35 Million Unrecognized transition asset \ 11 Million Unrecognized actuarial losses \ 1 Million Service cost \ 800,000 Interest cost 2,100,000 Actual return on plan assets (4,000,000) Assumptions: discount rate 9\% return on assets 10\% compensation growth 6\% a. If Pawn had increased its discount rate to 10% in 2006 what would be the effect on the accumulated benefit obligation, the projected benefit obligation, service cost and interest cost? b. Estimate the interest cost for 2007 under the existing plan.