Deck 2: Non-Current Financial Liabilities
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Deck 2: Non-Current Financial Liabilities
1
Sally has to decide between the following two options:
1)Take out a student loan of $60,000 and study accounting full time for the next three years.The interest on the loan is 5% per year payable annually.The principle to be paid in full after ten years.
"2)Study part time and work part time to earn $20,000 per year for the following six years.
Once Sally graduates,she estimates that she will earn $35,000 for the first three years and $50,000 the next four years.
Sally's banker says the market interest for a ten-year horizon is 7%.
Required:
a.Calculate NPV of the ten-year cash flows of the two options.For simplification assume that all cash flows happen at year-end.
b.Based on the NPV which of the two options is better for Sally?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?"
1)Take out a student loan of $60,000 and study accounting full time for the next three years.The interest on the loan is 5% per year payable annually.The principle to be paid in full after ten years.
"2)Study part time and work part time to earn $20,000 per year for the following six years.
Once Sally graduates,she estimates that she will earn $35,000 for the first three years and $50,000 the next four years.
Sally's banker says the market interest for a ten-year horizon is 7%.
Required:
a.Calculate NPV of the ten-year cash flows of the two options.For simplification assume that all cash flows happen at year-end.
b.Based on the NPV which of the two options is better for Sally?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?"

c.The primary benefit of leveraging is the higher envisaged return.Drawbacks to increased financial leveraging include a heightened risk of loss if estimates are not realized and an increased risk of bankruptcy.
2
Which statement best explains the concept of "leverage"?
A) A measure of the efficiency of the company.
B) A measure of solvency of the company.
C) A measure of the company's operations.
D) A measure of the company's debt paying ability.
A) A measure of the efficiency of the company.
B) A measure of solvency of the company.
C) A measure of the company's operations.
D) A measure of the company's debt paying ability.
B
3
Which statement is not correct about financial leverage for a $300,000 investment versus a $100,000 investment?
A) The probability of success is the same under both investment options.
B) The payout will be 3 times higher or 3 times lower with the larger investment.
C) The probability of success is 3 times greater with the larger investment.
D) The larger investment increases the return on equity but also faces a greater potential for loss.
A) The probability of success is the same under both investment options.
B) The payout will be 3 times higher or 3 times lower with the larger investment.
C) The probability of success is 3 times greater with the larger investment.
D) The larger investment increases the return on equity but also faces a greater potential for loss.
C
4
What are some considerations in determining a safe level of debt?
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5
Bank Buy Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below:
Required:
a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?

a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?
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6
Explain the meaning of financial leverage and leveraged buyout.
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7
Universal Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below:
Required:
a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?

a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?
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8
What are "non-current liabilities"?
A) Obligations that are expected to be settled in the next operating cycle of the company.
B) Obligations that are expected to be settled within the next 12 months.
C) Obligations that are expected to be settled more than 12 months after the company's year-end.
D) Obligations that are expected to be settled more than 24 months after the company's year-end.
A) Obligations that are expected to be settled in the next operating cycle of the company.
B) Obligations that are expected to be settled within the next 12 months.
C) Obligations that are expected to be settled more than 12 months after the company's year-end.
D) Obligations that are expected to be settled more than 24 months after the company's year-end.
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9
Complete the following chart to illustrate how leverage can increase investors' returns while concurrently exposing them to large losses.
Facts: Calabria Corporation is a new company and has only one asset,its cash of $105,000 from the sale of common shares.
In scenario 1,Calabria invests the $105,000 in a venture that will pay out either $85,000 or $135,000 at the end of one year,depending on the success of the venture.
In scenario 2,Calabria borrows $210,000 at 7% interest and invests $315,000 in the same project outlined in Scenario 1.The payout will be $255,000 ($85,000 × 3)or $405,000 ($135,000 × 3)because it invests three times as much.

Facts: Calabria Corporation is a new company and has only one asset,its cash of $105,000 from the sale of common shares.
In scenario 1,Calabria invests the $105,000 in a venture that will pay out either $85,000 or $135,000 at the end of one year,depending on the success of the venture.
In scenario 2,Calabria borrows $210,000 at 7% interest and invests $315,000 in the same project outlined in Scenario 1.The payout will be $255,000 ($85,000 × 3)or $405,000 ($135,000 × 3)because it invests three times as much.

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10
Which statement best explains a "leveraged buyout"?
A) A purchase where a small portion of the purchase price is raised by borrowing against the acquired assets.
B) A purchase where a significant portion of the purchase price is raised by borrowing against the acquired assets.
C) A purchase that is deemed too risky from a solvency perspective for the shareholders.
D) A purchase that is deemed too risky from a solvency perspective for the bondholders.
A) A purchase where a small portion of the purchase price is raised by borrowing against the acquired assets.
B) A purchase where a significant portion of the purchase price is raised by borrowing against the acquired assets.
C) A purchase that is deemed too risky from a solvency perspective for the shareholders.
D) A purchase that is deemed too risky from a solvency perspective for the bondholders.
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11
Which statement is correct about financial leverage?
A) It reduces the risk of bankruptcy to the company.
B) It reduces the level of risk exposure of the shareholders.
C) It quantifies the relationship between the relative level of a firm's debt and its equity base.
D) It has nothing to do with the relationship between the relative level of a firm's debt and its equity base.
A) It reduces the risk of bankruptcy to the company.
B) It reduces the level of risk exposure of the shareholders.
C) It quantifies the relationship between the relative level of a firm's debt and its equity base.
D) It has nothing to do with the relationship between the relative level of a firm's debt and its equity base.
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12
Which statement is correct about financial leverage?
A) Leverage can increase an investor's returns but also increases the risk of loss.
B) Leverage can decrease an investor's returns and also decrease the risk of loss.
C) Leverage decreases the payments that a company makes on an ongoing basis.
D) Leverage decreases the debt level relative to a company's equity base.
A) Leverage can increase an investor's returns but also increases the risk of loss.
B) Leverage can decrease an investor's returns and also decrease the risk of loss.
C) Leverage decreases the payments that a company makes on an ongoing basis.
D) Leverage decreases the debt level relative to a company's equity base.
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13
Why do bonds often include covenants?
A) To reduce information asymmetry.
B) To reduce moral hazard.
C) To compensate for value-added services.
D) To ensure repayment of the bond.
A) To reduce information asymmetry.
B) To reduce moral hazard.
C) To compensate for value-added services.
D) To ensure repayment of the bond.
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14
Which of the following would be a "non-current liability"?
A) Payment due after 3 years, but the company has violated the debt covenants.
B) Payment due to a supplier 45 days after year-end for supplies received before year-end.
C) Payment due to a supplier in 18 months for goods to be received 3 months after year-end.
D) Payment due after 3 years, on which the debt covenants have been not been violated.
A) Payment due after 3 years, but the company has violated the debt covenants.
B) Payment due to a supplier 45 days after year-end for supplies received before year-end.
C) Payment due to a supplier in 18 months for goods to be received 3 months after year-end.
D) Payment due after 3 years, on which the debt covenants have been not been violated.
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15
Sally has to decide between the following two options:
1)take out a student loan of $80,000 and study accounting full time for the next three years.The interest on the loan is 3% per year payable annually.The principle to be paid in full after ten years.
"2)study part time and work part time to earn $20,000 per year for the following six years.
Once Sally graduates she estimates that she will earn $35,000 for the first three years and $45,000 the next four years.
Sally's banker says the market interest for a ten-year horizon is 6%.
Required:
a.Calculate NPV of the ten-year cash flows of the two options.For simplification assume that all cash flows happen at year end.
b.Based on the NPV which of the two options is better for Sally?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?"
1)take out a student loan of $80,000 and study accounting full time for the next three years.The interest on the loan is 3% per year payable annually.The principle to be paid in full after ten years.
"2)study part time and work part time to earn $20,000 per year for the following six years.
Once Sally graduates she estimates that she will earn $35,000 for the first three years and $45,000 the next four years.
Sally's banker says the market interest for a ten-year horizon is 6%.
Required:
a.Calculate NPV of the ten-year cash flows of the two options.For simplification assume that all cash flows happen at year end.
b.Based on the NPV which of the two options is better for Sally?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?"
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16
Which statement is correct about the financial leverage of a company with an equity base of $400,000?
A) A company that borrows $150,000 is more leveraged than a company that borrows $250,000.
B) A company that borrows $250,000 is more leveraged than a company that borrows $150,000.
C) The return on equity of the company is unaffected by the financial leverage.
D) The return on equity of the company will be higher if it has a lower leverage.
A) A company that borrows $150,000 is more leveraged than a company that borrows $250,000.
B) A company that borrows $250,000 is more leveraged than a company that borrows $150,000.
C) The return on equity of the company is unaffected by the financial leverage.
D) The return on equity of the company will be higher if it has a lower leverage.
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17
Sally has to decide between the following two options:
1)Take out a student loan of $70,000 and study accounting full time for the next three years.The interest on the loan is 4% per year payable annually.The principle to be paid in full after ten years.
"2)Study part time and work part time to earn $15,000 per year for the following six years.
Once Sally graduates she estimates that she will earn $30,000 for the first three years and $40,000 the next four years.
Sally's banker says the market interest for a ten-year horizon is 6%.
Required:
a.Calculate NPV of the ten-year cash flows of the two options.For simplification assume that all cash flows happen at year-end.
b.Based on the NPV which of the two options is better for Sally?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?"
1)Take out a student loan of $70,000 and study accounting full time for the next three years.The interest on the loan is 4% per year payable annually.The principle to be paid in full after ten years.
"2)Study part time and work part time to earn $15,000 per year for the following six years.
Once Sally graduates she estimates that she will earn $30,000 for the first three years and $40,000 the next four years.
Sally's banker says the market interest for a ten-year horizon is 6%.
Required:
a.Calculate NPV of the ten-year cash flows of the two options.For simplification assume that all cash flows happen at year-end.
b.Based on the NPV which of the two options is better for Sally?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?"
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18
Fast Track Inc.is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below:
Required:
a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?

a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?
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19
What is a "covenant"?
A) Guarantee of the price to the borrower.
B) Contract that outlines the terms of the borrowing agreement.
C) Promise from the borrower to restrict certain activities.
D) Feature that permits the issuer to redeem before maturity.
A) Guarantee of the price to the borrower.
B) Contract that outlines the terms of the borrowing agreement.
C) Promise from the borrower to restrict certain activities.
D) Feature that permits the issuer to redeem before maturity.
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20
Blue Corp is in the process of acquiring another business.In light of the acquisition,shareholders are currently re-evaluating the appropriateness of the firm's capital structure (the types of and relative levels of debt and equity).The two proposals being contemplated are detailed below:
Required:
a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?

a.Calculate the estimated return on equity (ROE)under the two proposals.(ROE = net income after taxes / market value of equity; net income after taxes = (EBIT - interest on long-term debt)× (1 - tax rate)).
b.Which proposal will generate the higher estimated ROE?
c.What is the primary benefit of leveraging an investment decision? What are two drawbacks to leveraging an investment decision?
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21
What is meant by the "spread" charged by banks on loans?
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22
Contrast the two methods used by investment banks when selling bonds on behalf of a company,their client.
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23
What is a bond indenture?
A) Guarantee of the price to the borrower.
B) Contract that outlines the terms of the borrowing agreement.
C) Promise from the borrower to restrict certain activities.
D) Feature that permits the borrower to redeem before maturity.
A) Guarantee of the price to the borrower.
B) Contract that outlines the terms of the borrowing agreement.
C) Promise from the borrower to restrict certain activities.
D) Feature that permits the borrower to redeem before maturity.
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24
What does an "AAA" credit rating mean?
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25
Why are banks able to pay such low interest rates on customer deposits?
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26
Based on the characteristics provided below,what kind of bond is being discussed?
1.________ are a set of bonds issued at the same time but that mature at regular scheduled dates rather than all on the same date.
2.________ are bonds that never mature.
3.________ allow the holder to exchange the bond into other securities in the corporation,usually common shares.
4.________ protect investors against inflation.
1.________ are a set of bonds issued at the same time but that mature at regular scheduled dates rather than all on the same date.
2.________ are bonds that never mature.
3.________ allow the holder to exchange the bond into other securities in the corporation,usually common shares.
4.________ protect investors against inflation.
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27
Define the following:
a) Financial liabilities
b) A mortgage
c) A bond indenture
d) Secured bonds
e) Debentures
f) Stripped bonds
g) Serial bonds
h) Callable bonds
i) Convertible bonds
j) Inflation-linked or real-return bonds
k) Perpetual bonds
a) Financial liabilities
b) A mortgage
c) A bond indenture
d) Secured bonds
e) Debentures
f) Stripped bonds
g) Serial bonds
h) Callable bonds
i) Convertible bonds
j) Inflation-linked or real-return bonds
k) Perpetual bonds
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28
What are "stripped bonds"?
A) Bonds that pay the market rate of interest.
B) Bonds that are unsecured.
C) Bonds that pay no interest and are sold at a discount.
D) Bonds that are sold at a premium.
A) Bonds that pay the market rate of interest.
B) Bonds that are unsecured.
C) Bonds that pay no interest and are sold at a discount.
D) Bonds that are sold at a premium.
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29
What is "firm commitment" underwriting?
A) Broker's guarantee of the price to the borrower.
B) Broker sells as much of the debt issue as possible.
C) Debt that is backed by specific collateral.
D) Feature that permits the borrower to redeem before maturity.
A) Broker's guarantee of the price to the borrower.
B) Broker sells as much of the debt issue as possible.
C) Debt that is backed by specific collateral.
D) Feature that permits the borrower to redeem before maturity.
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30
What is the "best efforts" approach?
A) Broker's guarantee of the price to the borrower.
B) Broker sells as much of the debt issue as possible.
C) Debt that is backed by specific collateral.
D) Feature that permits the issuer to redeem before maturity.
A) Broker's guarantee of the price to the borrower.
B) Broker sells as much of the debt issue as possible.
C) Debt that is backed by specific collateral.
D) Feature that permits the issuer to redeem before maturity.
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31
Why do companies sell notes directly to the investing public?
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32
What are "debentures"?
A) Bonds that are unsecured.
B) Bonds that protect investors against inflation.
C) Bonds that mature at different dates.
D) Bonds backed by specific collateral.
A) Bonds that are unsecured.
B) Bonds that protect investors against inflation.
C) Bonds that mature at different dates.
D) Bonds backed by specific collateral.
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33
What are the reasons for issuing bonds rather than using a bank loan?
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34
What are "serial bonds"?
A) Bonds that are seldom used in Canada.
B) Bonds that mature at regular scheduled dates.
C) Bonds that are sold at a discount.
D) Bonds that are sold at a premium.
A) Bonds that are seldom used in Canada.
B) Bonds that mature at regular scheduled dates.
C) Bonds that are sold at a discount.
D) Bonds that are sold at a premium.
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35
What is the role of debt rating agencies and what two benefits result from their rating a company?
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36
Why do lenders avoid lending large amounts of money to one borrower?
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37
What are "callable bonds"?
A) Bonds that have cash flows indexed to inflation.
B) Bonds that can be redeemed 1 year before maturity.
C) Bonds that can be redeemed before maturity.
D) Bonds that are sold at a premium.
A) Bonds that have cash flows indexed to inflation.
B) Bonds that can be redeemed 1 year before maturity.
C) Bonds that can be redeemed before maturity.
D) Bonds that are sold at a premium.
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38
What are "zero-coupon bonds"?
A) Bonds that pay the market rate of interest.
B) Bonds that are unsecured.
C) Bonds that do not pay interest.
D) Bonds that are sold at a premium.
A) Bonds that pay the market rate of interest.
B) Bonds that are unsecured.
C) Bonds that do not pay interest.
D) Bonds that are sold at a premium.
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39
What are "secured bonds"?
A) Bonds that never mature.
B) Bonds that protect investors against inflation.
C) Bonds that mature at different dates.
D) Bonds backed by specific collateral.
A) Bonds that never mature.
B) Bonds that protect investors against inflation.
C) Bonds that mature at different dates.
D) Bonds backed by specific collateral.
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40
Explain the difference between real-return bonds,convertible bonds and perpetual bonds.
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41
A $100,000 5-year 7% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 6%.What is the selling price of the bonds,rounded to nearest dollar?
A) $4,213
B) $95,500
C) $100,000
D) $104,213
A) $4,213
B) $95,500
C) $100,000
D) $104,213
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42
A $100,000 5-year 7% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 6%.What is the selling premium or discount on the bonds,rounded to nearest dollar?
A) $4,213 discount
B) $4,213 premium
C) $100,000 discount
D) $104,213 premium
A) $4,213 discount
B) $4,213 premium
C) $100,000 discount
D) $104,213 premium
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43
When will bonds sell without a premium or discount?
A) When the coupon rate equals the par value.
B) When the coupon rate is below the market rate.
C) When the coupon rate is above the market rate.
D) When the coupon rate is equal to the market rate.
A) When the coupon rate equals the par value.
B) When the coupon rate is below the market rate.
C) When the coupon rate is above the market rate.
D) When the coupon rate is equal to the market rate.
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44
What is the effective interest rate?
A) Yield on the issue date.
B) Amount to be repaid at maturity.
C) Price of bond on issue date.
D) Interest rate specified in the bond indenture.
A) Yield on the issue date.
B) Amount to be repaid at maturity.
C) Price of bond on issue date.
D) Interest rate specified in the bond indenture.
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45
What are positive and negative covenants? Give an example of a positive and negative covenant.
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46
When will bonds sell at a discount?
A) When the coupon rate is below the par value.
B) When the coupon rate is below the market rate.
C) When the coupon rate is above the market rate.
D) When the coupon rate is above the par value.
A) When the coupon rate is below the par value.
B) When the coupon rate is below the market rate.
C) When the coupon rate is above the market rate.
D) When the coupon rate is above the par value.
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47
A $100,000 5-year 6% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 7%.What is the discount or premium of the sale of the bonds,rounded to nearest dollar?
A) $4,100 discount
B) $4,100 premium
C) $95,900 discount
D) $100,000 premium
A) $4,100 discount
B) $4,100 premium
C) $95,900 discount
D) $100,000 premium
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48
When will bonds sell at a premium?
A) When the coupon rate is equal to the par value.
B) When the coupon rate is below the market rate.
C) When the coupon rate is above the market rate.
D) When the coupon rate is equal to market value.
A) When the coupon rate is equal to the par value.
B) When the coupon rate is below the market rate.
C) When the coupon rate is above the market rate.
D) When the coupon rate is equal to market value.
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49
Based on the characteristics provided below,what kind of bond is being discussed?
1.________ permit the issuing company to redeem before maturity.
2.________ are bonds backed by specific collateral such as a mortgage on real estate.
3.________ are unsecured bonds.
4.________ are bonds that do not pay interest and are sold at a discount and mature at face value.
1.________ permit the issuing company to redeem before maturity.
2.________ are bonds backed by specific collateral such as a mortgage on real estate.
3.________ are unsecured bonds.
4.________ are bonds that do not pay interest and are sold at a discount and mature at face value.
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50
A $100,000 5-year 5% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 7%.What is the selling premium or discount on the bonds,rounded to nearest dollar?
A) $8,659 premium
B) $8,200 premium
C) $8,659 discount
D) $8,200 discount
A) $8,659 premium
B) $8,200 premium
C) $8,659 discount
D) $8,200 discount
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51
How should non-current financial liabilities be recorded initially?
A) At face value.
B) At fair value.
C) At fair value less transaction costs.
D) At face value less transaction costs.
A) At face value.
B) At fair value.
C) At fair value less transaction costs.
D) At face value less transaction costs.
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52
A $100,000 5-year 7% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 8%.What is the selling price of the bonds,rounded to nearest dollar?
A) $96,007
B) $103,993
C) $104,100
D) $95,890
A) $96,007
B) $103,993
C) $104,100
D) $95,890
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53
A $100,000 5-year 7% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 5%.What is the selling premium or discount on the bonds,rounded to nearest dollar?
A) $8,659 premium
B) $8,200 premium
C) $8,659 discount
D) $8,200 discount
A) $8,659 premium
B) $8,200 premium
C) $8,659 discount
D) $8,200 discount
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54
What is the coupon rate?
A) Yield on the issue date.
B) Amount to be repaid at maturity.
C) Rate of return earned by the investor.
D) Interest rate specified in the bond indenture.
A) Yield on the issue date.
B) Amount to be repaid at maturity.
C) Rate of return earned by the investor.
D) Interest rate specified in the bond indenture.
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55
A $100,000 5-year 6% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 8%.What is the selling price of the bonds,rounded to nearest dollar?
A) $91,575
B) $92,014
C) $107,985
D) $108,425
A) $91,575
B) $92,014
C) $107,985
D) $108,425
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56
A $100,000 5-year 6% bond is issued on January 1,2012.The bond pays interest annually.The market rate is 7%.What is the selling price of the bonds,rounded to nearest dollar?
A) $4,100
B) $95,900
C) $100,000
D) $104,213
A) $4,100
B) $95,900
C) $100,000
D) $104,213
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57
Non-current debt instruments exchanged for assets are recognized at:
A) book value.
B) fair value.
C) cash paid.
D) cash equivalents paid.
A) book value.
B) fair value.
C) cash paid.
D) cash equivalents paid.
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58
A $100,000 5-year 6% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 8%.What is the selling price of the bonds,rounded to nearest dollar?
A) $7,986
B) $92,014
C) $100,000
D) $108,425
A) $7,986
B) $92,014
C) $100,000
D) $108,425
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59
What is the market rate?
A) Price of bond on issue date.
B) Amount to be repaid at maturity.
C) Rate of return earned by the investor.
D) Interest rate specified in the bond indenture.
A) Price of bond on issue date.
B) Amount to be repaid at maturity.
C) Rate of return earned by the investor.
D) Interest rate specified in the bond indenture.
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60
A $100,000 5-year 7% bond is issued on January 1,2017.The bond pays interest annually.The market rate is 6%.What is the selling premium or discount on the bonds,rounded to nearest dollar?
A) $4,213 discount
B) $4,213 premium
C) $4,100 discount
D) $4,100 premium
A) $4,213 discount
B) $4,213 premium
C) $4,100 discount
D) $4,100 premium
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61
On November 1,2017,FastCare sold $5,000,000 of three-year bonds for $4,750,325. From the proceeds,the company paid accounting fees of 50,000.Interest of 5% is payable annually.What is the effective rate of interest (round to 2 decimal places)?
A) 7.30%
B) 5.00%
C) 4.69%
D) 3.63%
A) 7.30%
B) 5.00%
C) 4.69%
D) 3.63%
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62
On April 15,2017,Cando Inc.sold $10,000,000 of five-year,3% bonds for $9,972,469. From the proceeds,Cando paid its investment bank a $200,000 sales commission.
Interest is payable semi-annually on April 15 and October 15.What is the effective rate of interest (round to 2 decimal places)?
A) 1.53%
B) 1.75 %
C) 3.00%
D) 3.50%
Interest is payable semi-annually on April 15 and October 15.What is the effective rate of interest (round to 2 decimal places)?
A) 1.53%
B) 1.75 %
C) 3.00%
D) 3.50%
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63
On May 1,2017,Sea Escape Ltd.purchases a new automobile for $18,000 from the dealer who provides the financing.The three-year,interest-free loan is repayable at $500 per month.The market rate of interest for similar transactions is 0.25% per month.
Required:
Prepare journal entries to record:
a.the purchase of the automobile.
b.the accrual of interest and the loan payment at the end of May 2017.
Required:
Prepare journal entries to record:
a.the purchase of the automobile.
b.the accrual of interest and the loan payment at the end of May 2017.
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64
Cindy Corp sold $400,000 of three-year bonds for $300,500.Interest is of 7.5% is payable annually.What is the effective rate of interest (round to 2 decimal places)?
A) 19.15%
B) 14.57%
C) 13.88%
D) 7.50%
A) 19.15%
B) 14.57%
C) 13.88%
D) 7.50%
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65
Stay Fit for Life Inc.issues three series of $10,000,000 ten-year bonds dated January 1,2017 on the issue date.Interest is payable on June 30 and December 31 each year.Series A has a coupon rate of 7%; series B is 8%; and series C is 11 %.The market rate of interest at time of issue is 8%.
Required:
a.Prior to making any numerical calculations,comment on whether:
i.Series A will sell at a discount,par,or premium and briefly explain why.
ii.Series B will sell at a discount,par,or premium and briefly explain why.
iii.Series C will sell at a discount,par,or premium and briefly explain why.
b.Prepare journal entries to record the issuance of:
i.The series A bonds.
ii.The series B bonds.
iii.The series C bonds.
Required:
a.Prior to making any numerical calculations,comment on whether:
i.Series A will sell at a discount,par,or premium and briefly explain why.
ii.Series B will sell at a discount,par,or premium and briefly explain why.
iii.Series C will sell at a discount,par,or premium and briefly explain why.
b.Prepare journal entries to record the issuance of:
i.The series A bonds.
ii.The series B bonds.
iii.The series C bonds.
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66
Cartwright Corporation had a $1,350,000,5% bond available for issue on September 1,2017.Interest is to be paid quarterly beginning November 30th.All of the bonds were issued at par on October 1st.Prepare the journal entries for October 1st and November 30th.
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67
On June 1,2017,ABC LTD.provides a vendor with an $18,500 non-interest-bearing note due on June 1,2018,in exchange for furniture with a list price of $18,100.At what amount will the property be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 12% per annum for loans that mature in one year or less and 15% for loans with longer maturities.
A) $16,087
B) $16,518
C) $18,100
D) $18,500
A) $16,087
B) $16,518
C) $18,100
D) $18,500
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68
On May 1,2017,SBC INC.buys a photocopier listed for $2,900.The office supply store agrees to accept a $800 down payment and a $2,100,three-year note payable at $798 per year.The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities.At what amount will the note be recorded at in the accounting records?
A) $1,853
B) $1,950
C) $2,100
D) $2,900
A) $1,853
B) $1,950
C) $2,100
D) $2,900
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69
On June 1,2017,Bean LTD.provides a vendor with a $125,500 non-interest-bearing note due on June 1,2020,in exchange for equipment with a list price of $118,100.At what amount will the equipment be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 6% per annum for loans that mature in one year or less and 9% for loans with longer maturities.
A) $118,100
B) $105,372
C) $96,909
D) $91,195
A) $118,100
B) $105,372
C) $96,909
D) $91,195
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70
Over the River Co.(OTRC)sells $1,200,000 of 6-year,10% bonds at par plus accrued interest.The bonds are dated January 1,2017 but due to market conditions are not issued until May 1,2017.Interest is payable on June 30 and December 31 each year.The market rate of interest at time of issue is the same as the stated rate.
Required:
Prepare journal entries to record:
a.The issuance of the bonds on May 1,2017.Assume that OTRC has adopted a policy of crediting accrued interest payable for the accrued interest on the date of sale.
b.Payment of interest on June 30,2017.
c.Payment of interest on December 31,2017.
Required:
Prepare journal entries to record:
a.The issuance of the bonds on May 1,2017.Assume that OTRC has adopted a policy of crediting accrued interest payable for the accrued interest on the date of sale.
b.Payment of interest on June 30,2017.
c.Payment of interest on December 31,2017.
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71
Explain 3 instances when the fair value of the non-current liability will not equal the cash proceeds.
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72
On April 1,2017,a company sold $3,500,000 of ten year,6% bonds for $2,222,400. From the proceeds,the company paid $200,000 sales commission.Interest is payable semi-annually on April 1 and October 1.What is the effective rate of interest (round to 2 decimal places)?
A) 6.25%
B) 6.98%
C) 9.81%
D) 11.46%
A) 6.25%
B) 6.98%
C) 9.81%
D) 11.46%
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73
Explain how non-current liabilities are measured after initial recognition.
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74
Ginny Inc.sold $800,000 of two-year bonds for $701,500 less commissions of $50,500.Interest is of 5.5% is payable semi-annually.What is the effective rate of interest (round to 2 decimal places)?
A) 5.50%
B) 8.43%
C) 8.65%
D) 17.29%
A) 5.50%
B) 8.43%
C) 8.65%
D) 17.29%
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75
Canaroo Inc.sold $800,000 of two-year bonds for $701,500 less commissions of $50,500.Interest is of 5.5% is payable annually.What is the effective rate of interest (round to 2 decimal places)?
A) 5.50 %
B) 8.43%
C) 8.65%
D) 17.29%
A) 5.50 %
B) 8.43%
C) 8.65%
D) 17.29%
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76
On May 1,2017,SBC INC.buys a photocopier listed for $2,900.The office supply store agrees to accept a $800 down payment and a $2,100,three-year note payable at $798 per year including interest at 7%.The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities.At what amount will the photocopier be recorded at in the accounting records?
A) $1,950
B) $2,100
C) $2,900
D) $2,653
A) $1,950
B) $2,100
C) $2,900
D) $2,653
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77
On May 5,2017,Bennix sold $1,000,000 of five-year,3% bonds for $900,500. From the proceeds,the company paid fees of 100,000.Interest is payable semi-annually on May 5 and November 5.What is the effective rate of interest (round to 2 decimal places)?
A) 3.00%
B) 3.72 %
C) 3.95%
D) 6.27%
A) 3.00%
B) 3.72 %
C) 3.95%
D) 6.27%
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78
On May 1,2017,VeryFine LTD.provides a vendor with a $18,000 non-interest-bearing note due on May 1,2018 in exchange for furniture with a list price of $17,400.At what amount will the property be recorded in the accounting records? The company's banker has suggested that an appropriate market rate is 6% per annum for loans that mature in one year or less and 8% for loans with longer maturities.
A) $16,415
B) $16,667
C) $16,981
D) $18,000
A) $16,415
B) $16,667
C) $16,981
D) $18,000
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79
Cynthia Dixie Accounting Inc.takes advantage of a well-known office furnishings store's low-interest-rate financing.Cynthia buys furniture on the first day of its fiscal year,signing a $19,000,five-year note.The note is payable in full at maturity.Interest is payable annually at 2%.The market rate of interest for similar transactions is 5%.
Required:
Prepare journal entries to record:
a.The purchase of the office furniture.
b.The payment of interest and related amortization of the discount at the end of year 1.
Required:
Prepare journal entries to record:
a.The purchase of the office furniture.
b.The payment of interest and related amortization of the discount at the end of year 1.
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80
On May 1,2017,SBC INC.buys a computer listed for $12,600.The office supply store agrees to accept a $1,600 down payment and a $11,000,three-year note payable at $3,500 per year.The company's banker has suggested that an appropriate market rate is 11% per annum for loans that mature in one year or less and 14% for loans with longer maturities.At what amount will the note be recorded at in the accounting records?
A) $1,800
B) $8,126
C) $8,553
D) $11,000
A) $1,800
B) $8,126
C) $8,553
D) $11,000
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