Concept introduction:
Morals are judgments, standards, and rules of good conduct in the society. They guide people toward permissible behavior with regard to basic values.
Debt to Equity Ratio:
Debt to equity ratio is calculated to determine the leverage position of the company. It compares the total liabilities of the company with it total shareholders’ equity. The debt to equity ratio is calculated by dividing the Total Liabilities by Total
To indicate:
The action of the manager for change in the Debt to equity ratio.
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Cornerstones of Financial Accounting
- You are the newest member of the staff of Brinks & Company, a medium-size investment management firm. You are supervised by Les Kramer, an employee of two years. Les has a reputation as being technically sound but has a noticeable gap in his accounting education. Knowing you are knowledgeable about accounting issues, he requested you provide him with a synopsis of accounting for share issue costs. “I thought the cost of issuing securities is recorded separately and expensed over time,” he stated in a handwritten memo. “But I don’t see that for IBR’s underwriting expenses. What gives?” He apparently was referring to a disclosure note on a page of IBR’s annual report, photocopied and attached to his memo. To raise funds for expansion, the company sold additional shares of its $.10 par common stock. The following disclosure note appeared in the company’s most recent annual report: NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 10—Stock Transactions (in part) In February and March,…arrow_forwardThe founder of Frenza asks us to assist her in accounting and analysis of the corporation's bonds, which have an annual contract rate of 8%. She wants to know the business and accounting implications of further debt issuances as she looks for ways to finance the growth of Frenza. The following Tableau Dashboard is provided to help us address her questions and provide recommendations for her business decisions. $100,000 $80,000 $60,000 $40,000 $20,000 $0 Frenza Bond Amortization Carrying Value Unamortized Discount January 1, Year June 30, Year 1 December 31, June 30, Year 2 December 31, June 30, Year 3 December 31, 1 Year 1 Year 2 Year 3 Cash & Inventory for Competing Companies Market Rate for Company Bondsarrow_forwardThe founder of Frenza asks us to assist her in accounting and analysis of the corporation’s bonds, which have an annual contract rate of 8%. She wants to know the business and accounting implications of further debt issuances as she looks for ways to finance the growth of Frenza. The following Tableau Dashboard is provided to help us address her questions and provide recommendations for her business decisions. 1. Based on the current market rates for bonds of Frenza, Nelo, and Lika, which of the following bonds do lenders believe has the highest risk level?2. If Frenza decided to issue new bonds with a contract rate of 11%, would these new bonds be sold at a discount or premium based on the current market rate for Frenza bonds?3. Frenza is planning an $160,000 expansion to launch a new product line. Frenza currently earns $100,000 in net income, and the new product line will yield $50,000 in additional income before any interest expense. Frenza has three options: (1) do not expand, (2)…arrow_forward
- Nur Inc., is a private company that designs, manufactures, and distributes branded consumer products. During its most recent fiscal year, the had revenues of $200 million and earnings of $30 million. The company has filed a registration statement with the SEC for its IPO. Before the stock is offered, Nur's investment bankers would like to estimate the value of the company using comparable companies. The investment bankers have assembled the following information based on data for other companies in the same industry that have recently gone public. In each case, the ratios are based on the IPO price. After the IPO, Nur Inc will have 10 million shares outstanding. Estimate the IPO price for Nur Inc using the price/earnings ratio and the price/revenues ratio. Company Ray Products Corp. Byce-Frasier Inc. Fashion Industries Group Recreation International Average Price/Earnings Price/Revenues 18.8 X 19.5 X 24.1 X 22.4 X 21.2 X 1.2 X 0.9 X 0.8 X 0.7 X 0.9 Xarrow_forwardHanley Limited manufactures products that capture solar energy. The company plans to list its shares on the Venture Exchange. To do so, it must meet all of the following initial listing requirements (among others): Net tangible assets must be at least $500,000. Pre-tax earnings must be $50,000. The company must have adequate working capital. Hanley has experienced significant growth in sales and is having difficulty estimating its bad debt expense. During the year, the sales team has been extending credit more aggressively in order to increase their commission compensation. Under the percentage-of-receivables approach using past percentages, the estimate is $50,000. Hanley has performed an aging and estimates the bad debts at $57,000. Finally, using a percentage of sales, the expense is estimated at $67,000. Before booking the allowance, net tangible assets are approximately $550,000. The controller decides to accrue $50,000, which results in pre-tax earnings of $60,000.…arrow_forwardA Neighborhood hardware store is planning to add an equipment rental service to its business. It needs $30,000 to $40,000 to buy the rental equipment and expects rental sales of $3,000 to $3,500 per month. It rents its building with ten years remaining on its lease and has had stable total sales over the past several years. This exercise provides an example of how the aspects of equity and debt discussed in the lecture relate to a business situation. The following points should be covered. What is the hardware store's capacity to support equity or debt financing? What mixture of debt and equity is appropriate to use? What are the likely sources?arrow_forward
- Burton Howard, CFA, is an equity analyst with Maplewood Securities. Howard is preparinga research report on Confabulated Materials, SA, a publicly traded company based in Francethat complies with IFRS. As part of his analysis, Howard has assembled data gathered fromthe fi nancial statement footnotes of Confabulated’s 2009 Annual Report and from discussionswith company management. Howard is concerned about the eff ect of this information onConfabulated’s future earnings.Information about Confabulated’s investment portfolio for the years ended 31 December2008 and 2009 is presented in Exhibit 1. As part of his research, Howard is considering thepossible eff ect on reported income of Confabulated’s accounting classifi cation for fi xed incomeinvestments.EXHIBIT 1 Confabulated’s Investment Portfolio (€ Th ousands)Characteristic Bugle AG Cathay Corp Dumas SAClassifi cation Available-for-sale Held-to-maturity Held-to-maturityCost* €25,000 €40,000 €50,000Market value, 31 December 2008 29,000…arrow_forwardBurton Howard, CFA, is an equity analyst with Maplewood Securities. Howard is preparinga research report on Confabulated Materials, SA, a publicly traded company based in Francethat complies with IFRS. As part of his analysis, Howard has assembled data gathered fromthe fi nancial statement footnotes of Confabulated’s 2009 Annual Report and from discussionswith company management. Howard is concerned about the eff ect of this information onConfabulated’s future earnings.Information about Confabulated’s investment portfolio for the years ended 31 December2008 and 2009 is presented in Exhibit 1. As part of his research, Howard is considering thepossible eff ect on reported income of Confabulated’s accounting classifi cation for fi xed incomeinvestments.EXHIBIT 1 Confabulated’s Investment Portfolio (€ Th ousands)Characteristic Bugle AG Cathay Corp Dumas SAClassifi cation Available-for-sale Held-to-maturity Held-to-maturityCost* €25,000 €40,000 €50,000Market value, 31 December 2008 29,000…arrow_forwardBurton Howard, CFA, is an equity analyst with Maplewood Securities. Howard is preparinga research report on Confabulated Materials, SA, a publicly traded company based in Francethat complies with IFRS. As part of his analysis, Howard has assembled data gathered fromthe fi nancial statement footnotes of Confabulated’s 2009 Annual Report and from discussionswith company management. Howard is concerned about the eff ect of this information onConfabulated’s future earnings.Information about Confabulated’s investment portfolio for the years ended 31 December2008 and 2009 is presented in Exhibit 1. As part of his research, Howard is considering thepossible eff ect on reported income of Confabulated’s accounting classifi cation for fi xed incomeinvestments.EXHIBIT 1 Confabulated’s Investment Portfolio (€ Th ousands)Characteristic Bugle AG Cathay Corp Dumas SAClassifi cation Available-for-sale Held-to-maturity Held-to-maturityCost* €25,000 €40,000 €50,000Market value, 31 December 2008 29,000…arrow_forward
- Burton Howard, CFA, is an equity analyst with Maplewood Securities. Howard is preparinga research report on Confabulated Materials, SA, a publicly traded company based in Francethat complies with IFRS. As part of his analysis, Howard has assembled data gathered fromthe fi nancial statement footnotes of Confabulated’s 2009 Annual Report and from discussionswith company management. Howard is concerned about the eff ect of this information onConfabulated’s future earnings.Information about Confabulated’s investment portfolio for the years ended 31 December2008 and 2009 is presented in Exhibit 1. As part of his research, Howard is considering thepossible eff ect on reported income of Confabulated’s accounting classifi cation for fi xed incomeinvestments.EXHIBIT 1 Confabulated’s Investment Portfolio (€ Th ousands)Characteristic Bugle AG Cathay Corp Dumas SAClassifi cation Available-for-sale Held-to-maturity Held-to-maturityCost* €25,000 €40,000 €50,000Market value, 31 December 2008 29,000…arrow_forwardDavid Lyons, CEO of Lyons Solar Technologies, is concerned about his firm’s level of debt financing. The company uses short-term debt to finance its temporary working capital needs, but it does not use any permanent (long-term) debt. Other solar technology companies have debt, and Mr. Lyons wonders why they use debt and what its effects are on stock prices. To gain some insights into the matter, he poses the following questions to you, his recently hired assistant: Who were Modigliani and Miller (MM), and what assumptions are embedded in the MM and Miller models?arrow_forwardhe table below shows a book balance sheet for the Wishing Well Motel chain. The company’s long-term debt is secured by its real estate assets, but it also uses short-term bank loans as a permanent source of financing. It pays 14% interest on the bank debt and 10% interest on the secured debt. Wishing Well has 10 million shares of stock outstanding, trading at $83 per share. The expected return on Wishing Well’s common stock is 22%. (Table figures in $ millions.) Cash and marketable securities $ 110 Bank loan $ 280 Accounts receivable 180 Accounts payable 130 Inventory 50 Current liabilities $ 410 Current assets $ 340 Real estate 1,850 Long-term debt 1,390 Other assets 110 Equity 500 Total $ 2,300 Total $ 2,300 Calculate Wishing Well’s WACC. Assume that the book and market values of Wishing Well’s debt are the same. The marginal tax rate is 21%. (Do not round intermediate calculations. Enter your answer as a…arrow_forward
- Cornerstones of Financial AccountingAccountingISBN:9781337690881Author:Jay Rich, Jeff JonesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENT