mod. 7 Financial Statement Analysis
Heller Company issues $950,000 of 10% bonds that pay interest semiannually and mature in 10 years.What is the bonds' issue price assuming that the bonds' market interest rate is 14% per year? Select one: A. $ 748,714 B. $ 950,000 C. $ 751,788 D. $1,273,515 E. None of the above
A. $ 748,714 Rationale: Using a financial calculator or Excel the present value of the bonds = $748,714. Calculator Excel N = 20 Rate = 7% I/YR = 7 Nper = 20 PMT = -47,500 Pmt = -47,500 FV = -950,000 FV = -950,000 The correct answer is: $ 748,714
Reed Corp. sells $500,000 of bonds to private investors. The bonds are due in five years, have an 6% coupon rate, and interest is paid semiannually. The bonds were sold to yield 4%.What proceeds does Reed receive from the investors? Select one: A. $544,913 B. $474,345 C. $526,948 D. $499,999 E. None of the above
A. $544,913 Rationale: Using a financial calculator or Excel the present value of the bonds = $544,913. Calculator Excel N = 10 Rate = 2% I/Yr = 2 Nper = 10 PMT = -15,000 Pmt = -15,000 FV = -500,000 FV = -500,000 Type = 0 The correct answer is: $544,913
Butler, Inc. paid $75,000 to retire a note with a face value of $83,000. The note was issued with an 8% coupon rate paid semiannually. The note was three years from maturity and had a net book value of $68,200.What is the net gain or loss on the redemption of the note? Select one: A. $6,800 loss B. $8,000 gain C. $8,000 loss D. $6,800 gain E. None of the above
A. $6,800 loss Rationale: $75,000 paid - $68,200 book value = $6,800 net loss on redemption The correct answer is: $6,800 loss
Which one of the following would be considered a contingent liability? Select one: A. A company estimates that it will probably have to pay $75,000 to the EPA for a chemical spill. B. A company owes $35,000 on inventories purchased on credit. C. A company has access to a line of credit with a bank in the amount of $120,000. D. A company believes that it is reasonably possible it will lose a lawsuit and damages could be $100,000. E. None of the above
A. A company estimates that it will probably have to pay $75,000 to the EPA for a chemical spill.
What is the risk premium for a company that has a yield rate of 6.24% when the risk-free rate is 4.88%? Select one: A. 4.88% B. 1.36% C. 6.24% D. 11.12% E. None of the above
B. 1.36% Rationale: The risk premium can be found by subtracting the risk-free rate from the yield rate:(6.24% - 4.88% = 1.36%)
Which of the following does not affect the current liabilities section of the balance sheet? Select one: A. Insurance bill to be paid next month B. Sale of goods on credit C. Purchase of inventory on credit D. A probable legal obligation, due within 12 months E. Wages owing to employees but not yet paid
B. Sale of goods on credit
In general, how do credit analysts determine the risk-free rate? Select one: A. The average corporate yield B. The yield on U.S. Government borrowings C. The rate defined by the largest U.S. banks D. The weighted-average corporate yield based on the preceding four quarters E. None of the above
B. The yield on U.S. Government borrowings
Sykora Corp. sells $450,000 of bonds to private investors. The bonds are due in 5 years, have a 6% coupon rate and interest is paid semiannually. Sykora received $490,222 for the bonds at issuance.The effective rate on these bonds is: Select one: A. 6% B. 9% C. 4% D. 10% E. None of the above
C. 4% Rationale: Using a financial calculator or Excel the semi-annual effective interest rate on the bonds equals 2%, resulting in an annual effective rate of 4%. Calculator Excel N = 10 Nper = 10 PV = 490,222 Pmt = -13,500 PMT = -13,500 PV = 490,222 FV = -450,000 FV = -450,000 Type = 0 The correct answer is: 4%
Which one of the following is not correct? Select one: A. For debt issued at par: interest expense reported on the income statement equals the cash paid for interest. B. For bond repurchases: Gain (loss) on bond repurchase = Net book value of bonds - Cash paid to repurchase bonds. C. For debt issued at a discount: interest expense reported on the income statement equals cash interest payment less amortization of the discount. D. For debt issued at a premium, interest expense reported on the income statement equals cash interest payment less amortization of the premium. E. None of the above
C. For debt issued at a discount: interest expense reported on the income statement equals cash interest payment less amortization of the discount.
Which of the following would not require the company to record an accrual on the balance sheet? Select one: A. The company owes $43,000 in wages to its employees for the previous two weeks. B. Interest will be paid when a note payable matures in the following accounting period C. Management believes a lawsuit against the company is meritless because they have never had a single complaint about dangerous side effects of their drug in two years. D. The company knows that they will be fined for pollution as a result of their manufacturing process and can estimate the amount of the obligation. E. None of the above
C. Management believes a lawsuit against the company is meritless because they have never had a single complaint about dangerous side effects of their drug in two years.
Credit analysis concerns which of the following? Select one: A. The price of a company's stock B. The ability of a company to consistently pay dividends C. The probability a company will make timely payments D. An assessment of a company's credit-granting policies E. None of the above
C. The probability a company will make timely payments
Hudson Corp. sells $300,000 of bonds to private investors. The bonds have an 7% coupon rate and interest is paid semiannually. The bonds were sold to yield 10%.What periodic interest payment does Hudson make to its investors? Select one: A. $18,000 B. $20,000 C. $ 9,000 D. $10,500 E. None of the above
D. $10,500 Rationale: Coupon rates are used to compute the dollar amount in interest payments paid to the bondholder semiannually. Hudson pays $300,000 × 7% × ½ year = $10,500. The correct answer is: $10,500
Which of the following does not represent a current liability? Select one: A. Accrual of taxes payable B. Short-term loan C. Purchase of inventory on credit D. Bond issue E. None of the above
D. Bond issue
Which of the following corporate debt ratings are ordered in terms of decreasing market interest rate? Select one: A. AAA, A, BB, C B. A, AAA, BB, C C. BB, C, A, AAA D. C, BB, A, AAA E. None of the above
D. C, BB, A, AAA
Chang, Inc. issued a 3-month note in the amount of $360,000 on 12/01/17 with an annual rate of 5%.What amount of interest has accrued as of 12/31/17? Select one: A. $4,500 B. $1,479 C. $4,438 D. $ 950 E. $1,500
E. $1,500 Rationale: $360,000 × 5% × 1 / 12 months = $1,500
Which of the following business factors does not play a role in determining a company's credit rating? Select one: A. Industry characteristics B. Capital structure C. Management D. Profitability E. None of the above
E. None of the above
The coupon rate of a bond typically equals the yield (market) rate. Select one: True False
False
Gain or Loss on Bond Repurchase
Net Bonds Payable - Repurchase Payment
Accrued liabilities are obligations for which there is no external transaction. Select one: True False
True
In general, in a period of falling prices, LIFO produces higher gross profits than FIFO. Select one: True False
True
The gain (or loss) on the repurchase of a bond carries no economic effects, as the gain (or loss) is exactly offset by the present value of the future cash flow implications of the repurchase. Select one: True False
True
Time Value of Money computations using a calculator involves these five functions: (1) number of compounding periods, (2) interest rate (yield) per period, (3) the lump sum future value of the cash flows, (4) the annuity coupon or payment amount per discount period, and (5) the lump sum present value of the cash flows. Select one: True False
True
Interest Expense
principal x annual rate x time (portion of year outstanding)
Future Value
principal x factor
Computing Present Values of Single Amounts and AnnuitiesRefer to Tables 1 and 2 in Appendix A near the end of the book to compute the present value for each of the following amounts.
see "my business course exam #16"
Reformulating Financial Statements For Warranty Expense Over the past four years, Hashwari Corporation reported sales revenue and warranty expense as follows.
see "my business course exam #17"
Analyzing and Reporting Financial Statement Effects of Bond TransactionsLundholm, Inc., reports financial statements each December 31 and issues $500,000, 9%, 15-year bonds dated May 1, with interest payments on October 31 and April 30. Assuming the bonds are sold at par on May 1, complete the financial statement effects template to reflect the following events: (a) bond issuance, (b) the first semiannual interest payment, and (c) retirement of $300,000 of the bonds at 101 on November 1.
see "my business course exam #18"
Applying Time Value of Money ConceptsManchester Corporation takes a 20‑year mortgage of $15 million. The annual interest rate on the mortgage is 7% and payments are due at the end of each year.
see "my business course in class problems #1"
Analyzing Contingent and Other Liabilities The following independent situations represent various types of liabilities. Analyze each situation and indicate which of the following is the proper accounting treatment for the company: (a) record a liability on the balance sheet, (b) disclose the liability in a financial statement footnote, or (c) neither record nor disclose any liability.
see "my business course in class problems #2"
Reformulating Financial Statements For Warranty Expense Income statement data for Whirlpool Industries from the company's 2019 financial statements follow. Use these data to reformulate the income statement for 2017, 2018, and 2019 under the assumption that warranty expense is a constant percentage of revenue across all three years. Specifically, compute the adjustments to: warranty expense, income tax expense, and net income. The company's tax rate is 22%.
see "my business course in class problems #3"
Analyzing and Reporting Financial Statement Effects of Bond TransactionsOn January 1 of the current year, Banek Inc. issued $350,000 of 8%, nine‑year bonds for $309,086, which implies a market (yield) rate of 10%. Semiannual interest is payable on June 30 and December 31 of each year.
see "my business course in class problems #4"
Determining Bond Prices, Interest Rates, and Financial Statement EffectsDeere & Company's 2018 10-K reports the following footnote relating to long-term debt for its equipment operations subsidiary. Deere's borrowings include $300 million, 7.125% notes, due in 2031 (highlighted below).
see "my business course in class problems #5"
Analyzing Debt Terms, Yields, Prices, and Credit RatingsReproduced below is the debt footnote from the May 31, 2019, 10-K report of Oracle Corporation.
see "my business course in class problems #6"
