...ASSIGNMENT CLASSIFICATION TABLE (BY TOPIC) Topics 1. Long-term liability; classification; definitions. Issuance of bonds; types of bonds. Premium and discount; amortization schedules. Questions 1, 10, 14, 20, 23, 24, 25 2, 3, 4, 9, 10, 11 5, 6, 7, 8, 11 1, 2, 3, 4, 5, 6, 7 3, 4, 6, 7, 8, 10 Brief Exercises Exercises 1, 2 Problems 10, 11 Concepts for Analysis 1, 2, 3 2. 3, 4, 5, 6, 7, 8, 9, 10, 11 4, 5, 6, 7, 8, 9, 10, 11, 13, 14, 15 12, 13, 14, 15 16, 17, 18 19 1, 2, 3, 4, 5, 6, 7, 10 1, 2, 3, 4, 5, 6, 7, 10, 11 2, 4, 5, 6, 7, 10 8, 9 10 1, 3, 6 3. 1, 2, 3, 4 4. 5. 6. Retirement and refunding of debt. Imputation of interest on notes. Disclosures of long-term obligations. Troubled debt restructuring. 12, 13 14, 15, 16, 17, 18 19, 20, 21, 22, 23, 24 27, 28, 29, 30, 31, 32 11 12, 13, 14, 15 9 3, 4, 5 1, 3, 5 *7. 20, 21, 22, 23, 24, 25, 26 13, 14, 15 *This material is discussed in the Appendix to the Chapter. Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 14-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. 2. Describe the formal procedures associated with issuing long-term debt. Identify various types of bond issues. 1, 2 Brief Exercises Exercises Problems 3. Describe the accounting valuation for bonds at date of issuance. Apply the methods of bond discount and premium amortization. Describe the accounting for the extinguishment of debt. Explain the accounting for...
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...Financial Management Unit 4 Unit 4 4.1 Introduction 4.2 Valuation of Bonds Types of Bonds 4.2.1 Irredeemable or Perpetual Bonds Valuation Of Bonds And Shares 4.2.2 Redeemable or Bonds with Maturity Period 4.2.3 Zero Coupon Bond Bondyield Measures 4.2.1 Holding Period Rate of Return 4.2.2 Current Yield 4.2.3 Yield to Maturity (YTM) 4.2.4 Bond Value Theorems 4.3 Valuation of Shares 4.3.1 Valuation of Preference Shares 4.3.2 Valuation of Ordinary Shares 4.4 Summary Solved Problems Terminal Questions Answers to SAQs and TQs 4.1 Introduction Valuation is the process of linking risk with returns to determine the worth of an asset. Assets can be real or financial; securities are called financial assets, physical assets are real assets. The ultimate goal of any individual investor is maximization of profits. Investment management is a continuous process requiring constant monitoring. The value of an asset depends on the cash flow it is expected to provide over the holding period. The fact that as on date there is no method by which prices of shares and bonds can be accurately predicted should be kept in mind by an investor before he decides to take an investment decision. The present chapter will help us to know why some Sikkim Manipal University 50 Financial Management Unit 4 securities are priced higher than others. We can design our ...
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...Chapter 10 Valuation and Rates of Return Discussion Questions |10-1. |How is valuation of any financial asset related to future cash flows? | | | | | |The valuation of a financial asset is equal to the present value of future cash flows. | | | | |10-2. |Why might investors demand a lower rate of return for an investment in Microsoft as compared to United | | |Airlines? | | | | | |Because Microsoft has less risk than United Airlines, Microsoft has relatively high returns and a strong | | |market position; United Airlines has had financial difficulties and emerged from bankruptcy in 2006. | | | | |10-3. |What are the three factors that influence the required...
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...CHAPTER 16 SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 16-1 Cash ............................................................................. Discount on Bonds Payable ....................................... Bonds Payable ..................................................... BRIEF EXERCISE 16-2 Bonds Payable ........................................................... Discount on Bonds Payable .............................. Common Stock (2,000 X 50 X $10)..................... Paid-in Capital in Excess of Par— Common Stock ................................................ BRIEF EXERCISE 16-3 Preferred Stock (1,000 X $50) ..................................... Paid-in Capital in Excess of Par— Preferred Stock ($60 – $50) X 1,000 ....................... Common Stock (2,000 X $10) .............................. Paid-in Capital in Excess of Par—Common Stock ($60 X 1,000) – (2,000 X $10) .................. BRIEF EXERCISE 16-4 Cash ............................................................................. Discount on Bonds Payable ($2,000,000 – $1,940,784) ........................................ Bonds Payable ..................................................... Paid-in Capital—Stock Warrants ........................ Fair value of bonds (2,000 X $1,000 X .98) ................. Fair value of warrants (2,000 X $40) ........................... Aggregate fair value .................................................... Allocated to bonds [($1,960/$2,040) X $2,020,000] .... Allocated to...
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...computation. EPS—General objectives. EPS—Comprehensive calculations. EPS—Contingent shares. Stock appreciation rights. 16 Questions 1, 2, 3, 4, 5, 6, 7, 28 2, 3, 8, 9 1, 10, 11, 12, 13, 14, 15 17, 18, 24 19, 20, 21 Brief Exercises 1, 2, 3 4, 5 6, 7, 8 Exercises 1, 2, 3, 4, 5, 6, 7, 24, 25, 7, 8, 9, 28 10, 11, 12, 13, 14 1, 3, 4 Problems 2 Concepts for Analysis 1 1, 3 2, 4 4. 5. 15 12, 13, 14 22, 23, 27 6 5, 7 6. 7. 8. 9. 22, 23 15, 16 24, 25 10, 11 9, 15 28 15, 16, 17, 18, 21 5, 6, 7, 8, 9 5, 7 5, 6, 7 19, 20, 21, 22, 23, 24, 26, 27, 28 27 29, 30 7, 8, 9 10. *11. *This material is dealt with in an Appendix to the chapter. Copyright © 2010 John Wiley & Sons, Inc. Kieso, Intermediate Accounting, 13/e, Solutions Manual (For Instructor Use Only) 16-1 ASSIGNMENT CLASSIFICATION TABLE (BY LEARNING OBJECTIVE) Learning Objectives 1. Describe the accounting for the issuance, conversion, and retirement of convertible securities. 2. Explain the accounting for convertible preferred stock. 3. Contrast the accounting for stock warrants and for stock warrants issued with other securities. 4. Describe the accounting for stock compensation plans under generally accepted accounting principles. 5. Discuss the controversy involving stock compensation plans. 6. Compute earnings per share in a simple capital structure 7. Compute earnings per share in a complex capital structure. *8. Explain the accounting for stock-appreciation rights plans. *9. Compute...
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...Corporate Finance & Asset Markets M1 – Finance & Economics Track Solutions to Assignment 5: Section 8 - Interest Rates and Bonds Solutions to Part A: Practice Problems 1. When you are paying out money, you prefer not to pay interest on interest. Thus, you would prefer a low compounding frequency, which is monthly. 2. If the term structure is flat and a 2-year bond with a face value of $1,000 and a 3.5% annual coupon (paid semi-annually) is selling at par, this means that the annual discount rate (compounded semi-annually) is 3.5%, since 4 1, 000 = t=1 1, 000 17.50 + . t (1 + 0.0175) (1 + 0.0175)4 But then it is straightforward to value bonds with any coupon rate and maturity: (a) 10-year bond with a 2% coupon: 20 V = t=1 10 1, 000 + t (1 + 0.0175) (1 + 0.0175)20 1− 1 (1 + 0.0175)20 + 1, 000 (1 + 0.0175)20 = 10 0.0175 = 874. (b) 10-year bond with a 6% coupon: 20 V = t=1 1, 000 30 + t (1 + 0.0175) (1 + 0.175)20 1− 1 (1 + 0.0175)20 + 1, 000 (1 + 0.0175)20 = 30 0.0175 = 1, 209. 3. Expressing the present values bond prices B(0, t), we get A : 92.70 B : 102.10 C : 111.25 of the coupon bonds in terms of the pure discount = 103 B1 = 6 B1 + 106 B2 = 12 B1 + 12 B2 + 112 B3 Solving sequentially, the solution is B1 = 0.900, B2 = 0.912, and B3 = 0.799. 1 4. (a) The discount factors B1 and B2 implicit in the bonds prices should satisfy: 82.0 = 100 B2 92.5 = 6 B1 + 106 B2 102.5 = 12 B1 + 112 B2 Solving for B1 and B2...
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...cut in half. | | | | |16-2. |What are some specific features of bond agreements? | | | | | |The bond agreement specifies such basic items as the par value, the coupon rate, and the maturity date. | | | | |16-3. |What is the difference between a bond agreement and a bond indenture? | | | | | |The bond agreement covers a limited number of items, whereas the bond indenture is a supplement that often contains |...
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...BONDS AND SINKING FUNDS Amortization of Bond Premiums and Discounts *APPENDIX: The origin and calculation of bond premiums and discounts were discussed in Section 15.2. We will now look at the premiums and discounts from an accountant’s perspective. The point of view and the schedules developed here provide the basis for the accounting treatment of bond premiums, discounts, and interest payments. Amortization of a Bond’s Premium Bonds are priced at a premium when the coupon rate exceeds the yield to maturity required in the bond market. Suppose that a bond paying a 10% coupon rate is purchased three years before maturity to yield 8% compounded semiannually. The purchase price that provides this yield to maturity is $1052.42. The accounting view is that a period’s earned interest is the amount that gives the required rate of return on the bond investment. The interest payment after the first six months that would, by itself, provide the required rate of return (8% compounded semiannually) on the amount invested is 0.08 ϫ $1052.42 ϭ $42.10 2 The earned interest during the first six months from an accounting point of view is $42.10. The actual first coupon payment of $50 pays $50 Ϫ $42.10 ϭ $7.90 more than is necessary to provide the required rate of return for the first six months.7 The $7.90 is regarded as a refund of a portion of the original premium, leaving a net investment (called the bond’s book value) of $1052.42 Ϫ $7.90 ϭ $1044.52 This book...
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...Problems and Solutions 1 CHAPTER 1—Problems On 12/04/01, consider a fixed-coupon bond whose features are the following: • • 1.1 Problems on Bonds Exercise 1.1 face value: $1,000 coupon rate: 8% • coupon frequency: semiannual • maturity: 05/06/04 What are the future cash flows delivered by this bond? Solution 1.1 1. The coupon cash flow is equal to $40 8% × $1,000 = $40 2 It is delivered on the following future dates: 05/06/02, 11/06/02, 05/06/03, 11/06/03 and 05/06/04. The redemption value is equal to the face value $1,000 and is delivered on maturity date 05/06/04. Coupon = Exercise 1.3 An investor has a cash of $10,000,000 at disposal. He wants to invest in a bond with $1,000 nominal value and whose dirty price is equal to 107.457%. 1. What is the number of bonds he will buy? 2. Same question if the nominal value and the dirty price of the bond are respectively $100 and 98.453%. Solution 1.3 1. The number of bonds he will buy is given by the following formula Number of bonds bought = Cash Nominal Value of the bond × dirty price Here, the number of bonds is equal to 9,306 n= 2. n is equal to 101,562 n= Exercise 1.4 10,000,000 = 101,571.31 100 × 98.453% 10,000,000 = 9,306.048 1,000 × 107.457% On 10/25/99, consider a fixed-coupon bond whose features are the following: • face value: Eur 100 2 Problems and Solutions • • coupon rate: 10% coupon frequency: annual • maturity: 04/15/08 Compute the accrued interest taking into account the four different day-count...
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...Problem go to solution Business, Finance - Year 4 Calculate Market Value Capital Structure Suppose the Schoof Company has this book value balance sheet: Current Assets: $30 million Fixed Assets: $50 million Total Assets: $80 million Current Liabilities: $10 million Long-Term Debt: $30 million Common Equity: Common Stock (1 million shares): $1 million Retained Earnings: $39 million Total claims: $80 million The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. The long-term debt consists of 30,000 bonds, each of which has a par value of $1,000, carries an annual coupon interest rate of 6%, and matures in 20 years. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of $60 per share. Calculate the firm's market value capital structure. Suppose the Schoof Company has this book value balance sheet: Current Assets: $30 million Fixed Assets: $50 million Total Assets: $80 million Current Liabilities: $10 million Long-Term Debt: $30 million Common Equity: Common Stock (1 million shares): $1 million Retained Earnings: $39 million Total claims: $80 million The current liabilities consist entirely of notes payable to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. The long-term debt consists of 30,000 bonds, each of which...
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...following statements is most correct? a. Bond prices and interest rates move in the same direction, i.e., if interest rates rise, so will bond prices. b. The market price of a discount bond will approach the bond's par value as the maturity date approaches. Barring changes in the probability of default, there is no way the value of the bond can fail to increase each year as the time to maturity approaches. c. The "current yield" on a noncallable discount bond will normally exceed the bond's yield to maturity. d. The "current yield" on a noncallable discount bond will normally exceed the bond's coupon interest rate. e. All of the statements above are false. 2. If the yield to maturity decreased 1 percentage point, which of the following bonds would have the largest percentage increase in value? a. A 1-year bond with an 8 percent coupon. b. A 1-year zero-coupon bond. c. A 10-year zero-coupon bond. d. A 10-year bond with an 8 percent coupon. e. A 10-year bond with a 12 percent coupon. 3. Which of the following statements is most correct? a. The discount or premium on a bond can be expressed as the difference between the coupon payment on an old bond, which originally sold at par, and the coupon payment on a new bond, selling at par, where the difference in payments is discounted at the new market rate. b. The price of a coupon bond is determined primarily by the number of years to maturity. c. On a coupon paying bond, the final interest payment is made one...
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...Financial Management Weighted Average Cost of Capital 1 Weighted Average Cost of Capital (WACC) • This lecture answers the following questions: - What is the “opportunity” cost of funds for a firm, and thus the firm’s discount rate used in NPV calculations? - What is a firm’s Asset Beta & how do we lever Asset Betas and unlever Equity Betas? - Link to previous lectures - No longer use a “given” discount rate. We will calculate the correct discount rate for our NPV calculations. WACC - 1 2 1.0 The Cost of Capital: Some Preliminaries • A. Required (rate of) Return versus Cost of Capital • Cost of capital - required return - appropriate discount rate all denote the same opportunity cost of using capital in one way as opposed to an alternative investment in the financial market having the same systematic risk. – required return: is from an investor's point of view – cost of capital: is the same return from the firm's point of view – appropriate discount rate: is the same return yet again to be used in a present value calculation WACC - 2 3 B. Required (rate of) Return • COMBINING BOTH INVESTORS’ AND FIRMS’ PERSPECTIVES: • A FIRMS COST OF CAPITAL OR DISCOUNT RATE IS GIVEN BY INVESTORS REQUIRED RATE OF RETURN. • RETURN TO INVESTMENT DECISION!! • NPV of a project is dependent on: • (1) EXPECTED CASH FLOWS • (2) RISK WACC - 3 4 3 Determinants of Required (Rate of) Return • What are investors’ concerned with? (and thus firms should also be concerned...
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...Electric is reviewed the minutes of the meeting of the firm’s board of director. The major topic discussed was whether Seminole should refund a $500 million issued of 26 year, 16 percentage, and mortgage bonds issued in 11 months earlier. Three of the board member has taken markedly different positions. The bond has been issued the previous October, when interest rates were at their peak. At that time , Cahill and the board of director thought that interest rates were at a high and would likely decline in the future , but they had no idea that the slump would come so soon and be so sharp. Now, less than a year later, rated utility bonds such as those of Seminole, can be sold to yield only 12.5 percentages. Since Cahill anticipated a decline in interest rates when the $500 million was sold has had insisted that the bonds be made immediately callable. The investment bankers handling the issue wanted Seminole to make the bonds non-callable for a year period, but Cahill resisted this proposal. Cahill estimated that Seminole could sell a new issue of 25 year bonds at an interest rate of 12.5 percentages. The call of old and sales of new bonds would takes place in about five to seven weeks. Cahill has proposed, at the last director’s meeting that the company call the 16 percentage bonds and refunds them with a new 12.5 percentage issue. Although the refunding cost would be substantial, he believe that the saving of 3.5 percentage of a year for 25 year on a $500 million issued would be...
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...United States Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher. 0-07-151048-6 The material in this eBook also appears in the print version of this title: 0-07-146974-5. All trademarks are trademarks of their respective owners. Rather than put a trademark symbol after every occurrence of a trademarked name, we use names in an editorial fashion only, and to the benefit of the trademark owner, with no intention of infringement of the trademark. Where such designations appear in this book, they have been printed with initial caps. McGraw-Hill eBooks are available at special quantity discounts to use as premiums and sales promotions, or for use in corporate training programs. For more information, please contact George Hoare, Special Sales, at george_hoare@mcgraw-hill.com or (212) 904-4069. TERMS OF USE This is a copyrighted work and The McGraw-Hill Companies, Inc. (“McGraw-Hill”) and its licensors reserve all rights in and to the work. Use of this work is subject to these terms. Except as permitted under the Copyright Act of 1976 and the right to store and retrieve one copy of the work, you may not decompile, disassemble, reverse engineer, reproduce, modify, create derivative works...
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...debt issue, the manner in which the principal must be paid, and the restrictions (covenants) placed on the firm by the lenders. b. Trustee - the bondholders representative in a public debt offering. The trustee is 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...
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