Solomon Ch1 Deck 3 Flashcards
An indenture trustee is appointed by
the issuing company but outside the company
A stock with $38 in Equity per share selling at $28 per share is at a
premium to market
All income from zero coupon bonds comes from
the final payment (no interest)
LLC Stock is less easy to
transfer than a C corp
Because it is a noncash expense, on the Cash Flow Statement, depreciation must be
added (back) to income to arrive at true cash flow.
Changes in inventory must be adjusted on the cash flow statement because
They are not recorded on the income statement
In an inflationary environment, A change from FIFO to LIFO causes net income to
go down, because COGS increases
In an inflationary environment, a change from FIFO to LIFO causes COGS to
increase, because the more expensive newer goods are being sold first
An increase in interest rates makes a bond with a lower fixed coupon rate
less attractive, forcing fair market value downwards
The corporate structure with the most flexibility in profit retention is
C-Corp (non pass through taxation) because it allows distribution or retention without taxation on owner’s returns.
Risk that future coupons from a bond will not be reinvested at the prevailing interest rate at time of purchase.
Reinvestment Risk
Reinvestment risk is more likely when interest rates are
Declining
The only fixed income instruments with no reinvestment risk are
Zero coupon bonds because they have no interim coupon payments
Two factors increasing reinvestment risk are
Longer Maturity (raises likelihood interest rates will drop), Higher Interest rate of Bond (bigger coupon to reinvest)
When a security is sold and the seller does not identify which of the shares he is selling, the IRS will use the…
…FIFO method
