Even though bonds are debt obligations, investing in them involves risk. What are the sources of risk? What role do rating services play in managing risk?
> General Corporation acquired 80 percent of Strap Company’s voting common stock on January 1, 20X4, for $138,000. At that date, the fair value of the noncontrolling interest was $34,500. Strap’s balance sheet at the dat
> Palmer Corporation acquired 70 percent of Krown Corporation’s ownership on January 1, 20X8, for $140,000. At that date, Krown reported capital stock outstanding of $120,000 and retained earnings of $80,000, and the fair value of the noncontrolling intere
> Broadmore Corporation acquired 75 percent of Stem Corporation’s common stock on January 1, 20X8, for $435,000. At that date, Stem reported common stock outstanding of $300,000 and retained earnings of $200,000, and the fair value of the
> This exercise is a continuation of E5-13. Proud Corporation acquired 80 percent of Stergis C ompany’s voting stock on January 1, 20X3, at underlying book value. The fair value of the noncontrolling interest was equal to 20 percent of th
> Proud Corporation acquired 80 percent of Stergis Company’s voting stock on January 1, 20X3, at underlying book value. The fair value of the noncontrolling interest was equal to 20 percent of the book value of Stergis at that date. Assum
> Knox Corporation purchased 60 percent of Conway Company ownership on January 1, 20X7, for $277,500. Conway reported the following net income and dividend payments: On January 1, 20X7, Conway had $250,000 of $5 par value common stock outstanding and ret
> Pioneer Corporation purchased 80 percent of Lowe Corporation’s stock on January 1, 20X2. At that date, Lowe reported retained earnings of $80,000 and had $120,000 of stock outstanding. The fair value of its buildings was $32,000 more than the book value.
> Major Corporation acquired 90 percent of Lancaster Company’s voting common stock on January 1, 20X1, for $486,000. At the time of the combination, Lancaster reported common stock outstanding of $120,000 and retained earnings of $380,000, and the fair val
> Canton Corporation is a majority-owned subsidiary of West Corporation. West acquired 75 percent ownership on January 1, 20X3, for $133,500. At that date, Canton reported common stock outstanding of $60,000 and retained earnings of $90,000, and the fair v
> Power Corporation acquired 70 percent of Silk Corporation’s common stock on December 31, 20X2. Balance sheet data for the two companies immediately following the acquisition follow: At the date of the business combination, the book va
> Temple Corporation acquired 75 percent of Dynamic Corporation’s voting common stock on December 31, 20X4, for $390,000. At the date of combination, Dynamic reported the following: At December 31, 20X4, the book values of Dynamicâ
> Zenith Corporation acquired 70 percent of Down Corporation’s common stock on December 31, 20X4, for $102,200. The fair value of the noncontrolling interest at that date was determined to be $43,800. Data from the balance sheets of the t
> Power Company owns 90 percent of Pleasantdale Dairy’s stock. The balance sheets of the two companies immediately after the Pleasantdale acquisition showed the following amounts: The fair value of the noncontrolling interest at the dat
> Slim Corporation’s balance sheet at January 1, 20X7, reflected the following balances: Ford Corporation entered into an active acquisition program and acquired 80 percent of Slim’s common stock on January 2, 20X7, fo
> On June 10, 20X8, Game Corporation acquired 60 percent of Amber Company’s common stock. The fair value of the noncontrolling interest was $32,800 on that date. Summarized balance sheet data for the two companies immediately after the st
> Select the correct answer for each of the following questions. A 70 percent owned subsidiary company declares and pays a cash dividend. What effect does the dividend have on the retained earnings and noncontrolling interest balances in the parent compan
> Select the most appropriate answer for each of the following questions. 1. If A Company acquires 80 percent of the stock of B Company on January 1, 20X2, immediately after the acquisition, which of the following is correct? a. Consolidated retained earn
> During 20X4, Plate Company paid its employees $80,000 for work done in helping its wholly owned subsidiary build a new office building that was completed on December 31, 20X4. Plate recorded the $110,000 payment from the subsidiary for the work done as s
> What portion of the unrealized intercompany profit is eliminated in a downstream sale? In an upstream sale?
> What is a downstream sale? Which company may have unrealized profits on its books in a downstream sale?
> How are unrealized intercompany profits treated in the consolidated statements if the intercompany sale occurred in a prior period and the profits have not been realized by the end of the current period?
> How are unrealized profits on current-period intercompany sales treated in preparing the income statement for (a) the selling company and (b) the consolidated entity?
> Darwin Company holds assets with a fair value of $120,000 and a book value of $90,000 and liabilities with a book value and fair value of $25,000. Required Compute the following amounts if Brad Corporation acquires 60 percent ownership of Darwin: a.
> Roof Corporation acquired 80 percent of the stock of Gable Company by issuing shares of its common stock with a fair value of $192,000. At that time, the fair value of the noncontrolling interest was estimated to be $48,000, and the fair values of Gable’
> What is an upstream sale? Which company may have unrealized profits on its books in an upstream sale?
> In the consolidation of a prior-period unrealized intercompany gain on depreciable assets, why does the debit to the Investment account decrease over time?
> Par Company regularly purchases inventory from Eagle Company. Recently, Par Company purchased a majority of the voting shares of Eagle Company. How should Par Company treat inventory profits recorded by Eagle Company before the day of acquisition? Follow
> Unrealized profits from a prior-year upstream sale were realized in the current period. What effect will this event have on income assigned to the noncontrolling interest in the consolidated income statement for the current period?
> What effect does a negative retained earnings balance on the subsidiary’s books have on consolidation procedures?
> What portion of other comprehensive income reported by a subsidiary is included in the consolidated statement of comprehensive income as accruing to parent company shareholders?
> How do other comprehensive income elements reported by a subsidiary affect the consolidated financial statements?
> How is the amount of consolidated retained earnings assigned to the noncontrolling interest affected by unrealized inventory profits at the end of the year?
> How are dividends paid by a subsidiary to noncontrolling shareholders treated in the consolidation worksheet?
> How is income assigned to the noncontrolling interest shown in the consolidation worksheet?
> How is the income assigned to the noncontrolling interest normally computed?
> Why is there a need for a consolidation entry when an intercompany inventory transfer is made at cost?
> When majority ownership is acquired, what portion of the fair value of assets held by the subsidiary at acquisition is reported in the consolidated balance sheet?
> On January 1, 20X5, Block Corporation started using a wholly owned subsidiary to deliver all its sales overnight to its customers. During 20X5, Block recorded delivery service expense of $76,000 and made payments of $58,000 to the subsidiary. Require
> The newest clerk in the accounting office recently entered trial balance data for the parent company and its subsidiaries in the company’s consolidation program. After a few minutes of additional work needed to eliminate the intercompany investment accou
> You buy a stock for $20. After a year the price rises to $25 but falls back to $20 at the end of the second year. What was the average percentage return and what was the true annualized return?
> On January 31, 2001, you bought 100 shares of AVAYA (AV) for $17.50 a share. Subsequent prices of AV were January 1, 2002……..$8.60 January 1, 2003……….2.50 January 1, 2004………17.50 You owned the stock for three years (2001 to January 2004). What were your
> What is the difference between the following? a) Cross-sectional and time-series analysis b) The current ratio and the quick ratio c) Receivables turnover, inventory turnover, and fixed asset turnover d) The gross profit margin, the operating profit marg
> If a preferred stock is in arrearage, what does that imply about the dividend payment?
> How does preferred stock differ from common stock?
> What are the tax implications of the following? a) Dividend reinvestment plans b) Stock dividends c) Stock splits d) Corporate stock repurchases
> How do stock dividends differ from cash dividends? How do stock dividends differ from stock splits?
> What are the advantages associated with dividend reinvestment plans?
> What are the differences among the ex-dividend date, the date of record, and the distribution date?
> Why may a dividend increment lag after an increase in earnings? Why may a firm distribute dividends even though earnings decline?
> What is the purpose of each of the following? a) Preemptive rights b) Cumulative voting c) The board of directors
> What does it mean for investors who purchase IBM stock to have limited liability?
> What does the statement of cash flows add to the analyst’s knowledge of the firm?
> Do the fundamental economic goals of fiscal policy differ from those of monetary policy? If the Federal Reserve finances the federal government’s deficit, what will happen to the supply of money?
> What are M1 and M2? How does the Fed alter M1 and M2?
> What is the difference between the discount rate and the targeted federal funds rate?
> What differentiates inflation and deflation? If both GDP and unemployment were simultaneously rising, would this period be classified as a recession?
> If interest rates rise, bond prices will fall. Given the following pairs of bonds, indicate which bond’s price will experience the greater price decline. a) Bond A Coupon: 10% Maturity: 5 years Bond B Coupon: 6% Maturity: 5 years b) Bond A Coupon: 10% Ma
> Why is a barbell strategy more flexible than a laddered strategy if an investor anticipates a decline in interest rates?
> What differentiates the term of a bond and its duration? If bond A has a 10 percent coupon while bond B has a 5 percent coupon and they both mature after ten years,which bond has the shorter duration?
> What is the relationship between interest rates and the length of time to maturity? Figures 13.1 through 13.3 give various yield curves for U.S. Treasury securities. What is the current yield curve for U.S. Treasury securities? Possible sources for the a
> What is the yield to call? How does it differ from the yield to maturity?
> Although all bond prices fluctuate, which bond prices tend to fluctuate more?
> Define the current yield and the yield to maturity. How are they different?
> What causes bond prices to fluctuate?
> How do Treasury inflation-indexed securities help the investor manage risk?
> (This problem uses the material in Appendix 14B concerning bond valuation.) Two bonds have the following features: The structure of yields is a) What is the valuation of each security based on the yield to maturity for a five-year bond? b) What is the v
> In the section on the yield to call, a bond pays annual interest of $80 and matures after ten years. The bond is valued at $1,147 if the comparable rate is 6 percent and the bond is held to maturity. If, however, an investor expects the bond to be called
> Portfolio A consists entirely of $1,000 zero coupon bonds that mature in 8, 9, and 10 years. Portfolio B consists of $1,000, 8 percent coupons that mature in 10, 15, and 20 years. a) Based on this information, which portfolio appears to be riskier? Why?
> You own the following $1,000 bonds: Currently the structure of yields is positive so that each bond sells for its par value. However, you expect that inflation will increase and cause interest rates to rise so that the structure of yields becomes inverte
> A ten-year bond with a 9 percent coupon will sell for $1,000 when interest rates are 9 percent. What is the duration of this bond? Using duration to forecast the change in the price of the bond, calculate the difference between the forecasted and the act
> What is the difference between the following? a) The indenture and the trustee b) The coupon rate and the current rate of interest c) Debentures and secured bonds d) A sinking fund and a call feature e) Mortgage bonds and equipment trust certificates f)
> What is the price of each of the following bonds ($1,000 principal) if the current interest rate is 9 percent? b) What is the duration of each bond? c) Rank the bonds in terms of price fluctuations with the least volatile bond first and the most volatil
> Compute the duration for bond C, and rank the bonds on the basis of their price volatility. The current rate of interest is 8 percent, so the prices of bonds A and B are $1,000 and $1,268, respectively. Confirm your ranking by calculating the percentage
> The prices of longer-term bonds are more volatile than the prices of shorter-term bonds with the same coupon. The prices of bonds with smaller coupons are more volatile than bonds with larger coupons for the same term to maturity. However, you cannot com
> You purchase a 7 percent $1,000 bond with a term of ten years and reinvest all interest payments. If interest rates rise to 10 percent after you purchase the bond, what is the return on your investment in the bond?
> Stella’s Dog Biscuits Inc. has outstanding a high-yield bond with the following features: The current interest rate on comparable debt is 8 percent. a) If you expect that interest rates will be 8 percent five years from now, how much w
> An extendable bond has the following features: a) If comparable yields are 12 percent, what will be the price of the bond if investors anticipate that it will be retired after eight years? b) What impact will the expectation that the bond will be retire
> Tinker Spy Corp. has a high-yield junk bond with the following features: The current interest rate on comparable debt is 10 percent. If you expect that the interest rate will be 8 percent five years from now, what is your potential gain or loss if your e
> A bond has the following terms: a) Why do you believe that the terms were constructed as specified? b) What is the bond’s price if comparable debt yields 12 percent? c) What is the bond’s current yield? d) Even thoug
> What is the price of the following split coupon bond if comparable yields are 12 percent? If comparable yields decline to 10 percent, what is the appreciation in the price of the bond? Principal $1,000 Maturity 12 years Annual coupon 0% (S0) for year
> A high-yield bond has the following features: a) If comparable yields are 12 percent, what should be the price of this bond? b) Would you expect the firm to call the bond if yields are 12 percent? c) If comparable yields are 8 percent, what should be t
> When you purchase a bond, why do you have to pay accrued interest?
> Company X has the following bonds outstanding: Initially, both bonds sold at $1,000 with yields to maturity of 8 percent. a) After two years, the interest rate on comparable debt is 10 percent. What should be the price of each bond? b) After two additio
> What should be the prices of the following preferred stocks if comparable securities yield 6 percent, 8 percent, and 10 percent? a) MN Inc., $4 preferred ($100 par). b) CH Inc., $4 preferred ($100 par with the additional requirement that the firm must re
> a) If a preferred stock pays an annual dividend of $6 and investors can earn 10 percent on alternative and comparable investments, what is the maximum price that should be paid for this stock? b) If the preferred stock in part (a) had a call feature and
> a) A stock costs $900 and pays an annual $40 cash dividend. If you expect to sell the stock for $1,000 after five years, what is your anticipated return on the investment? b) A $1,000 bond has a 4 percent coupon and currently sells for $900. The bond mat
> Given the following information: XY Inc. 5% bond AB Inc. 14% bond Both bonds are for $1,000, mature in 20 years, and are rated AAA. a) What should be the current market price of each bond if the interest rate on triple-A bonds is 10 percent? b) Which bon
> A $1,000 zero coupon bond sells for $519 and matures after five years. What is the current yield and the yield to maturity?
> A company has two bonds outstanding. The first matures after five years and has a coupon rate of 8.25 percent. The second matures after ten years and has a coupon rate of 8.25 percent. Interest rates are currently 10 percent. What is the present price of
> A $1,000 bond has a coupon rate of 10 percent and matures after eight years. Interest rates are currently 7 percent. a) What will the price of this bond be if the interest is paid annually? b) What will the price be if investors expect that the bond will
> A $1,000 bond has a coupon rate of 8 percent and matures after ten years. a) What is the current price of the bond if the comparable rate of interest is 8 percent? b) What is the current price of the bond if the comparable rate of interest is 10 percent?
> How is the value of a convertible bond in terms of stock determined? What effect does this conversion value have on the price of the bond?
> You sell a 6 percent $10,000 bond for $9,180 plus $156 in accrued interest for a total of $9,336. Soon thereafter the company makes a $300 interest payment. You are in the 20 percent income tax bracket. a) How much tax do you owe on the interest? b) Comp
> Why is the debt of the federal government considered to be the safest of all possible investments?
> Identify which government securities may be appropriate for the following investors: a) A retired couple seeking income b) An individual in the highest tax bracket seeking a liquid investment c) An individual seeking a government bond for inclusion in an
> If interest rates increase, what should happen to the following? a) The price of a Ginnie Mae bond and the price of a municipal bond b) The payments received from a Ginnie Mae bond and the payments received from a municipal bond Contrast your answers to
> What is a mortgage pass-through bond? What risks are associated with investing in Ginnie Mae bonds? What is the composition of the payment received from a mortgage pass-through bond?
> What is the difference between a term bond issue and a serial bond issue? Why are many capital improvements made by state and local governments financed through serial bonds?
> What are the sources of risk from investing in the following? a) Federal government debt b) Municipal debt
> What is the difference between the following? a) A bond secured by a moral obligation and a bond secured by full faith and credit b) A revenue bond and a general obligation bond Are there any similarities between a bond secured by a moral obligation and
