...Background Hearts ‘R Us (“Hearts”), a young private research and development medical device company, sold $3.5 million of its Series A Preferred Shares on November 30, 2011 to Bionic Body (“Bionic”). This transaction gave the company enough financing for their heart valve system which they hope will revolutionize the way heart valve defects are repaired. In order to make this product available for sale they need a final approval by the FDA. The shares sold to Bionic have a par value of $1 per share and the purchase has given Bionic the following five rights: Board rights Mandatory Conversion Right Contingent Redemption Right Additional Protective Rights Right of First Refusal and Co-Sale Rights After Year 4, Hearts is still in the process of filing for FDA approval. The clinical testing and administrative process for filing for the FDA approval have taken much longer than initially anticipated. In addition, the trial results have been worrisome because of certain post-surgery issues that have been experienced by patients who received the Heart Valve System. It is certain the product will not receive FDA approval by end of Year 5. Hearts had planned to have an initial public offering (IPO) in the future. --- Whether the preferred stocks should be classified (treated) as a (debt/equity) is an accounting issue because of the guidance of the ASC Codification 815-15-25 (Derivatives and Hedging, Embedded Derivatives, Recognition) paragraph 17 shown below; 25-17 ...
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...Name: Junjian Lu PID: 4213070 Preferred stock and its market activities during 2005 to 2014 The preferred stock is a class of ownership in a corporation that has a higher claim on the assets and earnings than the common stock. Preferred stock generally has a dividend that must be paid out before dividends to common stockholders and the shares usually do not have voting rights. The Preferred stock experienced a rapid development at the late 1990s. According to Standard & Poor's statistics, the total value of U.S. preferred stock market had climbed to $193 billion in 2005; however, it was not the mainstream, which is only a small part compare to the same period U.S. stock market value. Nowadays, the diversified financials and banks mainly issue the preferred stocks. Although the preferred stock did not play a vital role in the percentage of total market, it helped the U.S. government saved the financial industry during the financial crisis in 2008. U.S. government announced a $125 billion purchase in the preferred stock of Citibank, JP Morgan Chase and other banks, which stabilized the stock market and helped them survived in the crisis. And it seems a win-win that U.S. government received marvelous dividends and the financial companies still control the company by themselves. Due to the low liquidity of preferred stock, apparently, it is the best choice of the long-term investors. As we are in the recovery period after the financial crisis, the interest...
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...The Risks of Preferred Stock Portfolios SLCG Working Paper 1 Abstract Preferred stocks are a hybrid of debt and equity. In this paper, we examine preferred stocks with an emphasis on the risks of holding portfolios of preferred stocks. We demonstrate that preferred stocks are similar to debt when the issuing company is financially healthy, and become more similar to equity when the company’s financial condition deteriorates. We show that issuers of preferred stocks are heavily concentrated in the financial services industry, a fact that exposes investors who hold a portfolio concentrated in preferred stocks to further risk - industry concentration risk. We illustrate the features of preferred stocks using the Fannie Mae 2008 issuance as a case study. I. Characteristics of Preferred Stocks Preferred stocks are a hybrid of debt and equity and have attributes of both securities. In an issuing company’s capital structure, they give investors a claim to income and assets before common equity investors but after debt holders. Preferred stocks pay a stream of fixed- or floating-rate payments similar to the coupon payments made on debt and provide no participation in the issuer’s residual gains or any voting rights. However, similar to dividend-paying equity, preferred stocks’ dividend payments are not a mandatory obligation of the issuer. Failure to pay preferred stock dividends does not constitute a default. Historically, most preferred stocks were cumulative, meaning that...
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...MEMO To: Borg Re: Preferred stock classification Facts Borg (the Company) is an early-stage research and development medical device company. Borg has no current products in the marketplace but is in the final stages of going to market with the Heart Valve System. All preliminary trials have been approved by the FDA, and the Company is in the final trial; once the final trial is complete, the Company will present the product to the FDA for final approval. If approved by the FDA, the Heart Valve System will revolutionize the way medical professionals repair heart valve defects. Bionic Body (“Bionic”), a SEC registrant, is a biological medical device company that focuses on the development of implantable biological devices, surgical adhesives, and biomaterials. Bionic could benefit from the approval of the Heart Valve System since it has a supplementary device that could be used in tandem with the Heart Valve System. As part of a financing strategy to support its operations, Borg sold Bionic $3.5 million of Series A Preferred Shares (the “Shares”) of the Company with a par value of $1 per Share. The transaction was completed on November 30, 2011. As part of the Series A Preferred Stock purchase agreement, Bionic has the following rights: * Board Rights — as the holder of the preferred stock, Bionic is entitled to appoint one member to the Company’s board of directors (the “Board”). In addition, Bionic has the right to appoint an observer to receive all information provided...
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...Preferred Shares (Stock) The words such as stock and securities are currently used not only by business-related I have chosen to research preferred stock for this individual project. At first, from an accounting stand point, capital stock (stock) is a part of shareholders’ equity as the later is composed of capital stock and retained earnings and represents the amount by which a company is financed through common and preferred shares. The definition of stock varies across the dictionaries. However, most dictionaries agree that stock (also referred to as shares or equity) is a share in the ownership of a company: “a type of security that signifies ownership in a corporation and represents a claim on part of the corporation’s assets and earnings” (<http://www.investopedia.com/terms/s/stock.asp#axzz1dhYoEz9a >) “entitling the stockholder to dividends and to other rights of ownership, such as voting rights” (<http://www.thefreedictionary.com/Stocker>). The stock original capital is paid into or invested in the business by its founders and is divided into multiple shares, the total of which is stated at the time of business formation. Additional paid in capital of the stock is raised through the sale of shares. As one acquires more stock, their ownership stake in the company becomes greater. There are two main types of stock: common and preferred. Preferred stock, as well as common stock, additional paid-in-capital, retained earnings, and treasury stock are...
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...The firm's tax rate is 40%. The current price of the 12% coupon, semiannual payment, non-callable bonds with 15 years to maturity is $1,153.72. New bonds could be issued with no flotation costs. The current price of the firm's 10% $100 par value, quarterly dividend, perpetual preferred stock is $116.95. The flotation costs on a new issue would be 5% of the proceeds. 4. The current price of the common stock is $50 per share. The last dividend was $4.19, and dividends are expected to grow at a constant rate of 5%. The firm's beta is 1.2, the yield on T-bonds is 7%, and the market risk premium is 6%. 5. The target capital structure is 30% long-term debt, 10% preferred stock, and 60% common equity. Procedure 1. What sources of capital should be included when you estimate XYZ's WACC? The WACC is used primarily for making long-term capital investment decisions, I.E., for capital budgeting. Thus, the WACC should include the types of capital used to pay for long-term assets, and this is typically long-term debt, preferred stock (if used), and common stock. Short-term sources of capital consist of (1) spontaneous, noninterest-bearing liabilities such as accounts payable and accruals and (2) short-term interest-bearing debt, such as notes payable. If the firm uses short-term interest-bearing debt to acquire fixed assets rather than just to finance working capital needs, then the wacc should include a short-term debt component. Noninterest bearing debt is generally not...
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...to your task: 1. The firm's tax rate is 40 percent. 2. The current price of Harry Davis’ 12 percent coupon, semiannual payment, noncallable bonds with 15 years remaining to maturity is $1,153.72. Harry Davis does not use short-term interest-bearing debt on a permanent basis. New bonds would be privately placed with no flotation cost. 3. The current price of the firm's 10 percent, $100 par value, quarterly dividend, perpetual preferred stock is $113.10. Harry Davis would incur flotation costs of $2.00 per share on a new issue. 4. Harry Davis’ common stock is currently selling at $50 per share. Its last dividend (d0) was $4.19, and dividends are expected to grow at a constant rate of 5 percent in the foreseeable future. Harry Davis’ beta is 1.2; the yield on t-bonds is 7 percent; and the market risk premium is estimated to be 6 percent. For the bond-yield-plus-risk-premium approach, the firm uses a 4 percentage point risk premium. 5. Harry Davis’ target capital structure is 30 percent long-term debt, 10 percent preferred stock, and 60 percent common equity. To structure the task somewhat, Jones has asked you to answer the following questions. a. 1. What sources of capital should be included when you estimate Harry Davis’ weighted average cost of capital (WACC)? Answer: The WACC is used primarily for making...
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...Corporation owns 85% of the common stock and 100% of the preferred stock of Subsidiary Corporation. The common stock and preferred stock have adjusted bases of $500,000 and $200,000, respectively, to Parent. Subsidiary adopts a plan of liquidation on July 3 of the current year, when its assets have a $1 million FMV. Liabilities on that date amount to $850,000. On November 9, Subsidiary pays off its creditors and distributes $150,000 to Parent with respect to its preferred stock. No cash remain to be aid to Parent with respect to the remaining $50,000 of its liquidation preference for the preferred stock, or with respect to any common stock. In each of Subsidiary’s tax years, less than %10 of its gross income has been passive income. What are the amount and character of Parent’s loss on the preferred and common stock? First, it should be determined whether the transaction meets nonrecognition requirements of Sec. 332. There are two cases that are on point in determining if Sec.332 applies to this liquidation, Spaulding Bakeries Inc., 27 T.C. 684 (1957) and H.K. Porter Co., Inc. 87 T.C. 689 (1986) In Spaulding Bakeries Inc., 27 T.C. 684 (1957), Spaulding Bakeries, the taxpayer purchased all the outstanding common and preferred stock of Hazleton Bakeries, Inc. between 1930 and 1946. In 1950, Hazleton Bakeries was liquidated and the taxpayer received the assets distributed in the liquidation. The distributed assets failed to cover the preferred stock's liquidation preference. No...
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...This week discussions of analyzing financial statements we discuss how to use the indirect and direct methods when putting statement of cash flows together. We also discussed how we use ratios, vertical and horizontal analysis to deciphering financial statements. Finally discuss was the preferred and common stocks issued, placed as journal entries on the financial statements and the paid out in dividends. With all these topics we saw why the financial statements are compiled the way they are by giving us a better understanding of how they work for the companies. Financial statements are analyzed by corporations so that they are able to identify their strengths and weaknesses. Identifying the relationship with the balance sheet a company’s profit and loss accounting will help making the decision process on how to proceed with certain changes or to eliminate them. External users of the companies looks at the information on the financial statements and decide whether or not they want to invest, but the company also uses those statements to help make the decisions that management needs to build. There are multiple ways to analyze financial statements, but this week we focused on ratio, vertical and horizontal analysis. Journal entries are used in a financial statement to identify a credit to or debit from the companies operational cash. When making the entries, the company has two of three things. The date of declaration, the record date, and the payment date. When making entry...
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...Venture Capital Funding Proposal Venture Capital Funding Proposal 08 Fall 08 Fall EXECUTIVE SUMMARY Mobileye N.V. is a growing competitor in the Advanced Driver Assistance Systems (ADAS) industry. Mobileye is the successful developer of the EyeQ software on a low cost, automotive standards chip that allows for real time interpretation of data on visual surroundings, assisting drivers in prevention of collisions and identification of threats. The single camera system and strong relationship that Mobileye maintains with currently 18 original equipment manufacturers (OEMs) means the product is low cost, but still maintains quality and effectiveness. Mobileye being the developer of its flagship product, the EyeQ, with primary costs to production being the purchase of microchips on which the software is reproduced, means that cost of revenues is low, output is highly scalable and so Mobileye is capable of devoting substantial portions of future earnings to further research, improving existing products and gaining further growth through introduction of other ADAS products. This suggests extremely positive growth potential for Mobileye over the medium term. The ADAS market in which Mobileye operates shows a potential compound annual growth rate of more than 50% until 2018 (vli Ltd, 2014). This expected growth is attributed to several strong factors. Firstly, rapid technological progress has substantially lowered costs to production, meaning a much broader market of vehicles...
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...[pic]CHAPTER 12 12-1 Decision makers use financial statement analysis to extract relevant information from financial statements in order to assess a company's financial position and prospects. 12-2 In addition to the basic financial statements, annual reports generally contain footnotes to the statements, a summary of accounting policies, management's discussion and analysis of the financial results, the auditor's report, comparative financial data for a series of years, and narrative data about the company, its operations, and its prospects. 12-3 Sources of information include reports to the SEC, press releases and articles in the business press, company Web sites, trade and industry publications, analysts’ reports, investors' services and newsletters. 12-4 No. Past results often aid the prediction of future returns and their risks. 12-5 Equity investors are most concerned with information about profitability and future security prices. In contrast, creditors mainly want to know about short-term liquidity and long-term solvency. 12-6 Yes, to a certain extent. When revenues increase faster than net income, it means that costs are increasing faster than revenues. However, it is important not to jump to conclusions without asking “why?”. There may be a good explanation for the cost increases. So it warrants attention, but one should not automatically conclude that something is wrong. 12-7 Business practices often change and, therefore, expected financial...
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...Chapter 12 1. Which intangible assets are amortized? Limited-Life Indefinite-Life a. Yes Yes b. Yes No c. No Yes d. No No 2. The cost of successfully defending a patent suit should be a. charged off in the current period. b. amortized over the legal life of the purchased patent. c. added to factory overhead and allocated to production of the product. d. amortized over the remaining estimated useful life of the patent. 3. Which of the following is not an intangible asset? a. Trade name b. Research and development costs c. Franchise d. Copyrights 4. When a new company is acquired, which of these intangible assets, unrecorded on the acquired company’s books, might be recorded in addition to goodwill? a. A brand name. b. A patent. c. A customer list. d. All of these answer choices are correct. 5. A loss on impairment of an intangible asset is the difference between the asset’s a. carrying amount and the expected future net cash flows. (triggers impairment) b. carrying amount and its fair value. (calculate the impairment loss) c. fair value and the expected future net cash flows. d. book value and its fair value. 6. When a patent is amortized, the credit is usually made to a. the Patents account. b. an Accumulated Amortization account(accumulated amort account not used for patent) c. a Deferred Credit account. d. an expense account. 7. Which of...
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...PREFERRED STOCK, LEASING, CONVERTIBLES, WARRANTS, AND OPTIONS II IIJ Understand the basic rights of preferred stockholders, the features of preferred stock, special types of preferred stock and the advantages and d isadva ntages of preferred stock. Review the basic types of leases, leasing a rrangements, the lease contract, the lease-versus-pur chase decision, the effects of leasing on future financing , and the adva ntages and d isadvan tages of leasing. Describe the basic types of converti ble securities, their general fea tures-incl ud ing the conver sion ratio, conversion period, conversion (or stock) value, and effect on earnings-and financ ing with convertibles. • II Demonstrate the procedures for dete rmi ning the stra ig ht bond value, conversion (or stock) va lue, and market value of a convertible bond. Explain the basic characteristics of stock purchase wa rrants, the implied price of an attached warrant, and the va lues of warrants-theoretical, market, and warrant premium. Define options and discuss the basics of ca ll s a nd puts, options markets, options trading, the role of call and put options in fund raising, and using options to hedge foreign currency expo sures. the DISCIPLINES CHA PTER 14 I S I MPOR TA NT TO • u((ounting personnel who will provide important data a nd tax insights to the lease-versus-purchase decision process. • information systems analysts who will design systems that p'ro vide...
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...of capital—-debt, preferred stock, and common equity. Each weighting factor is the proportion of that type of capital in the optimal, or target, capital structure. The after-tax cost of debt, rd(1 - T), is the relevant cost to the firm of new debt financing. Since interest is deductible from taxable income, the after-tax cost of debt to the firm is less than the before-tax cost. Thus, rd(1 - T) is the appropriate component cost of debt (in the weighted average cost of capital). b. The cost of preferred stock, rps, is the cost to the firm of issuing new preferred stock. For perpetual preferred, it is the preferred dividend, Dps, divided by the net issuing price, Pn. Note that no tax adjustments are made when calculating the component cost of preferred stock because, unlike interest payments on debt, dividend payments on preferred stock are not tax deductible. The cost of new common equity, re, is the cost to the firm of equity obtained by selling new common stock. It is, essentially, the cost of retained earnings adjusted for flotation costs. Flotation costs are the costs that the firm incurs when it issues new securities. The amount actually available to the firm for capital investment from the sale of new securities is the sales price of the securities less flotation costs. Note that flotation costs consist of (1) direct expenses such as printing costs and brokerage commissions, (2) any price reduction due to increasing the supply of stock, and (3) any drop...
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...responsible for monitoring the borrower's compliance with the terms of the indenture. c. Call feature - a provision that permits the bond issuer to retire the obligation prior to its maturity. d. Sinking fund - a method of providing for the gradual retirement of a bond issue. The sinking fund requirement can be met by depositing a certain amount of money annually in a sinking fund account. Alternatively, the firm can either purchase a portion of the debt each year in the open market or, if the debt is callable, use a lottery technique to determine which actual bonds will be called and retired each year. e. Conversion feature - a provision that allows the holder to exchange the bond for shares of the company's common stock at the option of the holder. f. Coupon rate - the annual rate of interest paid to bondholders. It is expressed as a percentage of par value. 2. a. Mortgage bond - a debt issue that is secured by specific physical assets of the issuing company. b. Debenture - an unsecured debt issue. The quality of the debt issue depends on the general credit-worthiness of the issuing company. c. Subordinated debenture - an unsecured debt issue that is “junior” to other types of debt. In the event of liquidation or reorganization of the company, claims of subordinated debenture holders are considered only after the claims of unsubordinated debt holders d. Equipment trust certificate - used...
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