Fundamentals Of Financial Accounting
6th Edition
ISBN: 9781259864230
Author: PHILLIPS, Fred, Libby, Robert, Patricia A.
Publisher: Mcgraw-hill Education,
expand_more
expand_more
format_list_bulleted
Question
Chapter 11, Problem 3Q
To determine
To explain: The reason behind the proposal given by Company GM and to identify the reason behind the rejection of proposal by the bondholders.
Expert Solution & Answer
Want to see the full answer?
Check out a sample textbook solutionStudents have asked these similar questions
46. One of the points below is the most accurate?a. After a company files for bankruptcy, the administrator liquidates it, using the money to compensate bondholders, overdue salaries, royalties, and legal fees.b. Where the price of the bond approaches the sinking fund call price, a company with a sinking fund payout due will typically opt to purchase back bonds on the open market.c. Income bonds incur dividends only after the amount of interest received by the corporation is directly earned. As a result, these securities cannot default a corporation, making them better for investors than traditional bonds.d. One drawback to zero coupon bonds being that the tax gains from selling securities are not realised before the bonds maturity.e. Callable bonds should have a lower yield to maturity than noncallable bonds, assuming all other factors remain stable.
Which of the following statements is CORRECT?
a. One disadvantage of zero coupon bonds is that the issuing firm cannot realize any tax savings from the use of debt until the bonds mature.
b. Income bonds must pay interest only if the company earns the interest. Thus, these securities cannot bankrupt a company prior to their maturity, and this makes them safer to the issuing corporation than "regular" bonds.
c. Once a firm declares bankruptcy, it must be liquidated by the trustee, who uses the proceeds to pay bondholders, unpaid wages, taxes, and legal fees.
d. Other things held constant, a callable bond should have a lower yield to maturity than a noncallable bond.
e. A firm with a sinking fund that gives it the choice of calling the required bonds at par or buying the bonds in the open market would generally choose the open market purchase if the coupon rate exceeded the going interest rate.
52. Which of the following statements is incorrect?a. Firms will often voluntarily enter bankruptcy before they are forcedinto bankruptcy by their creditors.b. An indenture is a bond that is less risky than a subordinateddebenture.c. When a firm files for Chapter 11 bankruptcy, it may attempt torestructure its existing debt by changing (subject to creditorapproval) the interest payments, maturity, and/or principal amount.d. All else equal, mortgage bonds are less risky than debentures becausemortgage bonds provide investors with a lien (that is, a claim)against specific property.e. A company’s bond rating is affected by financial performance andprovisions in the bond contract.
Chapter 11 Solutions
Fundamentals Of Financial Accounting
Ch. 11 - Prob. 1QCh. 11 - Prob. 2QCh. 11 - Prob. 3QCh. 11 - Explain each of the following terms: (a)...Ch. 11 - What are the differences between common stock and...Ch. 11 - What is the distinction between par value and...Ch. 11 - What are the usual characteristics of preferred...Ch. 11 - What items are included in Accumulated Other...Ch. 11 - What is treasury stock? Why do corporations...Ch. 11 - How is treasury stock reported on the balance...
Ch. 11 - What are the two financial requirements to support...Ch. 11 - What is the difference between cumulative and...Ch. 11 - What is a stock dividend? How does a stock...Ch. 11 - What are the primary reasons for issuing a stock...Ch. 11 - Your company has been very profitable and expects...Ch. 11 - Identify and explain four important dates with...Ch. 11 - Prob. 17QCh. 11 - How do stock repurchases affect the EPS and ROE...Ch. 11 - What is one interpretation of a high P/E ratio?Ch. 11 - Prob. 20QCh. 11 - Which feature is not applicable to common stock...Ch. 11 - Which statement regarding treasury stock is false?...Ch. 11 - Which of the following statements about stock...Ch. 11 - Which of the following is ordered from the largest...Ch. 11 - Prob. 5MCCh. 11 - A journal entry is not recorded on what date? a....Ch. 11 - Prob. 7MCCh. 11 - Prob. 8MCCh. 11 - Prob. 9MCCh. 11 - Prob. 10MCCh. 11 - Equity versus Debt Financing Indicate whether each...Ch. 11 - Computing the Number of Issued Shares Face 2 Face...Ch. 11 - Computing the Number of Unissued Shares The...Ch. 11 - Analyzing and Recording the Issuance of Common...Ch. 11 - Analyzing and Recording the Issuance of No-Par...Ch. 11 - Determining the Effects of Stock Issuance and...Ch. 11 - Determining the Amount of a Dividend Netpass...Ch. 11 - Recording Dividends On May 20, the board of...Ch. 11 - Determining the Impact of a Stock Dividend Sturdy...Ch. 11 - Determining the Impact of a Stock Split Complete...Ch. 11 - Determining the Amount of a Preferred Dividend...Ch. 11 - Determining the Amount of a Preferred Dividend...Ch. 11 - Calculating and Interpreting Earnings per Share...Ch. 11 - Inferring Financial Information Using the P/E...Ch. 11 - (Supplement 11A) Comparing Owner's Equity to...Ch. 11 - (Supplement 11B) Recording a Stock Dividend To...Ch. 11 - Computing Shares Outstanding The 2016 annual...Ch. 11 - Reporting Stockholders' Equity and Determining...Ch. 11 - Preparing the Stockholders' Equity Section of the...Ch. 11 - Reporting the Stockholders' Equity Section of the...Ch. 11 - Determining the Effects of the Issuance of Common...Ch. 11 - Recording and Reporting Stockholders' Equity...Ch. 11 - Finding Amounts Missing from the Stockholders'...Ch. 11 - Recording Treasury Stock Transactions and...Ch. 11 - Prob. 9ECh. 11 - Computing Dividends on Preferred Stock and...Ch. 11 - Recording Dividends and Preparing a Statement of...Ch. 11 - Analyzing Stock Dividends On December 31, the...Ch. 11 - Prob. 13ECh. 11 - Comparing 100 percent Stock Dividend and 2-for-1...Ch. 11 - Journalizing Cash Dividends Bogscraft Company has...Ch. 11 - Preparing a Statement of Retained Earnings and...Ch. 11 - Determining the Effect of a Stock Repurchase on...Ch. 11 - (Supplement 11 A) Comparing Stockholders' Equity...Ch. 11 - Prob. 19ECh. 11 - Analyzing Accounting Equation Effects, Recording...Ch. 11 - Recording Stock Dividends Activision Blizzard,...Ch. 11 - Finding Missing Amounts At December 31, the...Ch. 11 - Prob. 4CPCh. 11 - Prob. 5CPCh. 11 - Analyzing Accounting Equation Effects, Recording...Ch. 11 - Recording Cash Dividends National Chocolate Corp....Ch. 11 - Finding Missing Amounts At December 31, the...Ch. 11 - Calculating Common and Preferred Cash Dividends...Ch. 11 - Prob. 5PACh. 11 - Analyzing Accounting Equation Effects, Recording...Ch. 11 - Prob. 2PBCh. 11 - Prob. 3PBCh. 11 - Prob. 4PBCh. 11 - Prob. 5PBCh. 11 - Financial Reporting of Depreciation, Write-off,...Ch. 11 - Prob. 2COPCh. 11 - Prob. 1SDCCh. 11 - Prob. 2SDCCh. 11 - Prob. 4SDCCh. 11 - Prob. 5SDCCh. 11 - Critical Thinking: Making a Decision asan Investor...Ch. 11 - CC11 Accounting for Equity Financing Nicole has...
Knowledge Booster
Similar questions
- Mary Tokar is comparing a GAAP-based company to a company that uses IFRS. Both companies report available-for-sale debt investments. The IFRS company reports unrealized losses on these investments under the heading “Reserves” in its equity section. However, Mary can find no similar heading in the GAAP-based company financial statements. Can Mary conclude that the GAAP-based company has no unrealized gains or losses on its available-for-sale debt investments? Explain.arrow_forwardRegarding the use of bonds or preferred stock for raising equity, which of the following statements is true regarding the potential of triggering bankruptcy? Oa. Non-payment of bond interest can trigger a company into bankruptcy. Ob. Non-payment of preferred dividends can trigger a company into bankruptcy. c. Bankruptcy cannot be triggered until there is non-payment of both bond interest and preferred dividends. d. Bankruptcy cannot be triggered by either non-payment of bond interest or preferred dividends.arrow_forwardBriefly describe bankruptcy law. If a firm wereto default on its bonds, would the company beliquidated immediately? Would the bondholdersbe assured of receiving all of their promisedpayments?arrow_forward
- During the 2008 recession, large financial institutions including investment and insurance companies, were at risk of bankruptcy due to the sub-prime mortgage crisis. Which element of insurance risk best demonstrates this concept? A. the loss produced by the risk must be definite B. the loss produced by the risk must be measurable C. the loss must not be catastrophic D. the loss must be fortuitous or accidentalarrow_forwardA company has an agreement with a bondholder that prevents it from selling several of its coal-fired power plants. However, recent regulatory changes have made these plants less profitable and the value of the firm is falling. Which of the following is this agreement called? Collateral trust Lien Indenture Debenturearrow_forwardWhich of the following statements are true about unsecured bonds?I. Income bonds require interest payments only if earned and non-payment of interest does not lead to bankruptcy. Usually issued during the reorganization of a firm facing financial difficulties. II. Debentures are unsecured long-term debt and backed only by the reputation and financial stability of the corporation. Because of this, the earning ability of the issuing corporation is of great concern to the bondholder.III. Claims of bondholders of subordinated debentures are honored only after the claims of secured debt and unsubordinated debentures have been satisfied. IV. Income bonds have longer maturity and unpaid interest is allowed to accumulate for some period of time and must be paid prior to the payment of any dividends to stockholders.arrow_forward
- Renaldo Inc. wishes to acquire Messi Corporation but is uncertain which would be the best method to use to accomplish this. Messi has substantial debt due to back taxes and also debt due to unprofitable business decisions. Unfortunately Messi Corporation has been highly undercapitalized. Renaldo is deciding between a stock purchase and an asset purchase and seeks your opinion on the matter. What would you tell them about their options?arrow_forwardRoss’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over the management of the company. Changes in consumer demand have made it hard for Ross to attract customers. Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term—a current asset. On the controller’s…arrow_forwardWhich of the following statements is CORRECT? a. Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. b. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. c. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued. d. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price. e. A sinking fund provision makes a bond more risky to investors at the time of issuance.arrow_forward
- 3) In the fall of 2008, AIG, the largest insurance company in the world at the time, was at risk 3 of defaulting due to the severity of the global financial crisis. As a result, the U.S. government stepped in to support AIG with large capital injections and an ownership stake. How would this affect, if at all, the yield and risk premium on AIG corporate debt?arrow_forward171.One of the elements addressed in the Dodd-Frank bill was authority over nonbank financial institutions that face bankruptcy. A)True B)False 172.The Dodd-Frank bill established the Consumer Financial Protection Bureau to help consumers understand the financial impact of Social Security. A)True B)False 173.Explain the trade-off between rate of return and liquidity. How do banks affect the trade-off? 174.What is maturity transformation? Explain the difference between maturity transformation by depository banks and by shadow banks. 175.Explain how shadow banks, which don't take deposits, can have bank runs. 176.Explain the two main causes of banking crises. 177.What caused the banking crises in the 1990s in Finland, Sweden, and Japan? 178.Describe the financial contagion that occurred during the Irish banking crisis in 2008. 179.Why are banking-crisis recessions so bad? 180.Explain the difference…arrow_forwardWhich of the following statements is most correct? Why?* choices: a. The expected return on corporate bonds will generally exceed the yield to maturity. b. Firms that are in financial distress are forced to declare bankruptcy. c. All else equal, senior debt will generally have a lower yield to maturity than subordinated debt. d. Statements a and c are correct. e. None of the statements above is correct.arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
- Intermediate Financial Management (MindTap Course...FinanceISBN:9781337395083Author:Eugene F. Brigham, Phillip R. DavesPublisher:Cengage LearningEBK CONTEMPORARY FINANCIAL MANAGEMENTFinanceISBN:9781337514835Author:MOYERPublisher:CENGAGE LEARNING - CONSIGNMENTBusiness/Professional Ethics Directors/Executives...AccountingISBN:9781337485913Author:BROOKSPublisher:Cengage
Intermediate Financial Management (MindTap Course...
Finance
ISBN:9781337395083
Author:Eugene F. Brigham, Phillip R. Daves
Publisher:Cengage Learning
EBK CONTEMPORARY FINANCIAL MANAGEMENT
Finance
ISBN:9781337514835
Author:MOYER
Publisher:CENGAGE LEARNING - CONSIGNMENT
Business/Professional Ethics Directors/Executives...
Accounting
ISBN:9781337485913
Author:BROOKS
Publisher:Cengage