Accounting (Text Only)
26th Edition
ISBN: 9781285743615
Author: Carl Warren, James M. Reeve, Jonathan Duchac
Publisher: Cengage Learning
expand_more
expand_more
format_list_bulleted
Concept explainers
Question
Chapter 14, Problem 14.4CP
To determine
Bonds: Bonds are long-term promissory notes that are represented by a company while borrowing money from investors to raise fund for financing the operations.
To discuss: the advantages and disadvantages of issuing preferred stock versus bonds.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Bolster Inc. has decided to expand its operations to owning and operating car washes. The following is an excerpt from the conversation between the chief executive officer, Mike O'Brian, and the vice president of finance, John Ibison:
Mike: John, have you given any thought to how we're going to manage the acquisition of Swiffer Car Wash?
John: Well, the two basic options, as I see it, are to issue either preferred stock or bonds. The equity market is a little depressed right now. The rumor is that the Federal Reserve Bank's going to increase the interest rates either this month or next.
Mike: Yes. I've heard the rumor. The problem is that we can't wait around to see what's going to happen. We'll have to move on this next week if we want any chance to complete the acquisition of Swiffer Car Wash.
John: Well, the bond market is strong right now. Maybe we should issue debt this time around.
Mike: That's what I would have guessed as well. Swiffer Car Wash's financial statements look pretty…
Bolster Inc. has decided to expand its operations to owning and operating car washes. The following is an excerpt from the conversation between the chief executive officer, Mike O'Brian, and the vice president of finance, John Ibison:
Mike: John, have you given any thought to how we're going to manage the acquisition of Swiffer Car Wash?
John: Well, the two basic options, as I see it, are to issue either preferred stock or bonds. The equity market is a little depressed right now. The rumor is that the Federal Reserve Bank's going to increase the interest rates either this month or next.
Mike: Yes. I've heard the rumor. The problem is that we can't wait around to see what's going to happen. We'll have to move on this next week if we want any chance to complete the acquisition of Swiffer Car Wash.
John: Well, the bond market is strong right now. Maybe we should issue debt this time around.
Mike: That's what I would have guessed as well. Swiffer Car Wash's financial statements look pretty…
Your company is finally ready to sell its shares to the public. The manager of your company decided to sell 20% of total shares to an investment bank. In which market
this transaction will take place?
Select one:
a.Secondary market
b.Bonds market
c.Primary market
d.Stock exchange market
e.None of the above
Chapter 14 Solutions
Accounting (Text Only)
Ch. 14 - Describe the two distinct obligations incurred by...Ch. 14 - Explain the meaning of each of the following terms...Ch. 14 - If you asked your broker to buy you a 12% bond...Ch. 14 - Prob. 4DQCh. 14 - If bonds issued by a corporation are sold at...Ch. 14 - The following data relate to a 2,000,000, 8% bond...Ch. 14 - Bonds Payable has a balance of 5,000,000, and...Ch. 14 - What is a mortgage note?Ch. 14 - Fleeson Company needs additional funds to purchase...Ch. 14 - In what section of the balance sheet would a bond...
Ch. 14 - Prob. 14.1APECh. 14 - Alternative financing plans Brower co. is...Ch. 14 - Prob. 14.2APECh. 14 - Issuing bonds at face amount On January 1, the...Ch. 14 - Issuing bonds at a discount On the first day of...Ch. 14 - Issuing bonds at a discount On the first day of...Ch. 14 - Prob. 14.4APECh. 14 - Prob. 14.4BPECh. 14 - Prob. 14.5APECh. 14 - Prob. 14.5BPECh. 14 - Prob. 14.6APECh. 14 - Prob. 14.6BPECh. 14 - A Redemption of bonds payable A 1,500,000 bond...Ch. 14 - Prob. 14.7BPECh. 14 - Journalizing installment notes On the first day of...Ch. 14 - Journalizing installment notes On the first day of...Ch. 14 - Prob. 14.9APECh. 14 - Prob. 14.9BPECh. 14 - Effect of financing on earnings per share Domanico...Ch. 14 - Evaluate alternative financing plans Based on the...Ch. 14 - Prob. 14.3EXCh. 14 - Prob. 14.4EXCh. 14 - Entries for issuing bonds Gabriel Co. produces and...Ch. 14 - Prob. 14.6EXCh. 14 - Prob. 14.7EXCh. 14 - Prob. 14.8EXCh. 14 - Entries for issuing and calling bonds; gain Emil...Ch. 14 - Entries for installment note transactions On the...Ch. 14 - Prob. 14.11EXCh. 14 - Prob. 14.12EXCh. 14 - Reporting bonds At the beginning of the current...Ch. 14 - Prob. 14.14EXCh. 14 - Prob. 14.15EXCh. 14 - Prob. 14.16EXCh. 14 - Present value of amounts due Tommy John is going...Ch. 14 - Prob. 14.18EXCh. 14 - Prob. 14.19EXCh. 14 - Prob. 14.20EXCh. 14 - Prob. 14.21EXCh. 14 - Present value of bonds payable; premium Moss Co....Ch. 14 - Prob. 14.23EXCh. 14 - Appendix2 Amortize premium by interest method...Ch. 14 - Prob. 14.25EXCh. 14 - Prob. 14.26EXCh. 14 - Prob. 14.1APRCh. 14 - Prob. 14.2APRCh. 14 - Prob. 14.3APRCh. 14 - Entries for bonds payable and installment note...Ch. 14 - Prob. 14.5APRCh. 14 - Prob. 14.6APRCh. 14 - Effect of financing on earnings per share Three...Ch. 14 - Prob. 14.2BPRCh. 14 - Prob. 14.3BPRCh. 14 - Prob. 14.4BPRCh. 14 - Prob. 14.5BPRCh. 14 - Prob. 14.6BPRCh. 14 - Prob. 14.1CPCh. 14 - Ethics and professional conduct in business Solar...Ch. 14 - Prob. 14.3CPCh. 14 - Prob. 14.4CPCh. 14 - Prob. 14.5CPCh. 14 - Times interest earned The following financial data...
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, accounting and related others by exploring similar questions and additional content below.Similar questions
- (a) Describe what it means if a new company decides to issue its ordinary shares to investors in instalments, and why they might sell shares this way. (b) John’s Building Company needs to raise $100,000 cash from share investors and asks for your advice for designing the sale of the shares. He wants to sell ordinary shares. First, use your imagination to determine a reasonable sale price per share. Then, design a traditional 3 step instalment plan for collection of the cash from investors. Hint: you may consider that the Application period will commence on 1st February 2022. Outline the basic details of your plan, including beginning and ending dates for each stage of your plan.arrow_forwardYou own stocks in an oil palm plantation company, and you read in the financial press that a recent bond offering has raised the firm’s debt-equity ratio from 30 percent to 55 percent. Discuss how this change would affect your required rate of return on the common stock of the company. Provide your justification(s) to support your views in the answer space provided.arrow_forwardYour company is rapidly growing and needs additional capital to expand the online retailing portion of its business model. One group of the board of directors proposes that the company issue $800,000 of additional common stock, while a separate group of the board is in favor of issuing the same amount of long-term bonds. As a possible compromise, the company’s investment banker suggests that the company issue convertible bonds. The board asks you to write a memo examining the advantages and disadvantages of convertible bonds. The company currently has 200,000 common shares outstanding, and the stock is currently trading at a price of $30 per share. The company’s effective interest rate is 10%; however, the investment banker believes that the convertible debt could be issued at a 6% interest rate. Write a memo to the board of directors detailing how convertible bonds work and the advantages and disadvantages of the security. In addition, provide details on how the issuance of the…arrow_forward
- In the Republic of Atlantis the regulators decide to allow private placement of equity (see problem set 2 extra questions). A firm called Fish Inc. currently trades in their stock market at a price of $3 (Atlantic dollars) with 100 million shares outstanding. The manager currently needs to raise extra $300m. They decide to do that in a private placement and sell the shares to an individual investor at a discount of 20% of current share price. Which of the following statements is (are) true: (i) Private placements are fair. (ii) The company will issue 125m extra shares. (iii) Pre-existing investors will lose $34p per share.Required to answer. Single choice.arrow_forwardABC Trading wants to raise equity to fund an acquisition of a small company (XYZ). ABC is considering two choices: (i) using an underwriting syndicate, (ii) a rights offering. The price of ABC stock is $60 and there are 250 million shares outstanding. (a) ABC issues a rights offer to its existing stockholders that lets them purchase stock at the price of $58 each. (Note: stockholders will receive one right for each 12.5 shares they own, so only 20 million shares can be issued). What are the net proceeds to the company if it sells 20 million shares using the rights offering?arrow_forwardSibongile is considering investing in a newly listed company on the JSE, known as Abital Ltd. She comes to you for advice about whether to invest in their bonds or shares, and has collected the following information from the recently published financial statements: Number of outstanding shares 10 000 000 Earnings 25 000 000 Payout ratio 35% Cost of equity 11% Current market price of one share R10 Number of Bonds outstanding 4 000 000 Abital Ltd recently acquired a patent that expires in 3 years. Their earnings are therefore expected to grow at 20% during these 3 years, after which it will decline to a constant 5%. What is the intrinsic value of Abital ltd?arrow_forward
- Answer the following questions in a separate document. Explain how you reached the answer or show your work if a mathematical calculation is needed, or both. Submit your assignment using the assignment link. Bad Boys, Inc. is evaluating its cost of capital. Under consultation, Bad Boys, Inc. expects to issue new debt at par with a coupon rate of 8% and to issue new preferred stock with a $2.50 per share dividend at $25 a share. The common stock of Bad Boys, Inc. is currently selling for $20.00 a share. Bad Boys, Inc. expects to pay a dividend of $1.50 per share next year. An equity analyst foresees a growth in dividends at a rate of 5% per year. The Bad Boys, Inc. marginal tax rate is 35%. If Bad Boys, Inc. raises capital using 45% debt, 5% preferred stock, and 50% common stock, what is Bad Boys, Inc.’s cost of capital? If Bad Boys, Inc. raises capital using 30% debt, 5% preferred stock, and 65% common stock, what is Bad Boys, Inc.’s cost of capital?arrow_forwardABC Trading wants to raise equity to fund an acquisition of a small company (XYZ). ABC is considering two choices: (i) using an underwriting syndicate, (ii) a rights offering. The price of ABC stock is $60 and there are 250 million shares outstanding. (a) If ABC agrees to pay 3% to an underwriter to issue the stock, what are the net proceeds to the company if it sells 20 million shares to the public for $60 each?arrow_forwardYou are an investment adviser. One of your clients approaches you for your advice on investing in equity shares of Alpha Company. You have collected the following data: Earnings per share last year $4.00 Payout ratio 0.40 Return on equity 0.25 Cost of equity capital 0.20 The company plans to increase the payout ratio to 50% after year 5. Required: i) Estimate the price of an equity share of this company using an appropriate dividend discount model and advise your client whether they should buy a share of the company. ii) Your client is keen to know whether there are any positive growth opportunities from their investment. Explain to your client the meaning of this concept using appropriate calculations. Note: Use two decimal places in your calculationsarrow_forward
- Flora plc is a largo listed company which needs to raise new equity finance. It has decided to make an offer of new shares direct to the investing public.What method of public offer is being used by Flora plc?A. Offer for saleB. Initial Public Offering (IPO)C. Offer for subscriptionD. Underwritten offer for sale by tenderarrow_forwardYou are considering a stock investment in one of two firms (LotsofDebt, Incorporated and LotsofEquity, Incorporated), both of which operate in the same industry. Lots of Debt, Incorporated finances its $31.00 million in assets with $29.50 million in debt and $1.50 million in equity. LotsofEquity, Incorporated finances its $31.00 million in assets with $1.50 million in debt and $29.50 million in equity. Calculate the debt ratio. Calculate the equity multiplier. Calculate the debt-to-equity. Complete this question by entering your answers in the tabs below. Debt ratio Equity multiplier Debt to equity Calculate the debt ratio. Note: Round your answers to 2 decimal places. Debt ratio LotsofDebt, Incorporated % LotsofEquity, Incorporated %arrow_forwardWith firm commitment underwriting, the investment banker O A. purchases all of the shares of stock from the company and then sells them to the investing public O B. does it best to sell as many securities as possible O C. receives a fee for each security sold O D. All things being equal, the issuing company (going public) would prefer the firm commitment basis since this assures from the that all of the shares are sold. O E. Both A & Darrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Intermediate Accounting: Reporting And AnalysisAccountingISBN:9781337788281Author:James M. Wahlen, Jefferson P. Jones, Donald PagachPublisher:Cengage Learning
Intermediate Accounting: Reporting And Analysis
Accounting
ISBN:9781337788281
Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach
Publisher:Cengage Learning