final chap 9 and 10

Question 1

interest expense

Answer 1

principal * annual interest rate * # of months/ 12

Question 1

key steps in bond calculations

Answer 1

1. adjust number of periods (up)

bond term (in years) * frequency per year = n

2. adjust interest rate (down) based on frequency of payments

market rate of interest / frequency per year = i

3. use market rate of interest:
4. 1. discounting to PV
5. 2. calculating interest expense
6. use coupon rate only for cash payment calculation

Question 2

working capital

Answer 2

CA- CL

Question 3

single sum

Answer 3

future value * discount factor = present value

Question 4

bonds payable

Answer 4

annuity (coupon payments) + single sum ( face value)

Question 5

bond features

Answer 5

secured –> collateral
unsecured–> no collateral
callable –> can retire early
convertible –> can convert to equity

Question 6

par

Answer 6

coup= market
issue price= face value
Int expense= cash interest payments

Question 7

discount

Answer 7

coup<market
issue price<face>cash interest payments</face>

interest expense + bond value increase over time

Question 8

premium

Answer 8

coup>market
issue price>face value
Int expense<cash interest payments

interest expense + bond value decrease over time

Question 9

current liabilities

Answer 9

• A/P, acc exp, deferred revenues
• 12 months ones

Question 10

advantages and disadvantages of bonds

Answer 10

adv:
stockholders maintain control, portion of interest expense is tax deductible, issuing bonds can increase the return to shareholders

no dilution , possibly lower interest rates,

disadv:
risk of bankruptcy, Negative impact on cash flows

Question 11

contingent liabilities

Answer 11

Recorded on BS: must be both
If value is known
If probable of occurring, greater than 70% chance of occurring
(if only reasonably possible, but value is known disclose it in notes)