1 Consider the following facts: - On January 1, 2015, Company A had 21,000 share
ID: 2458983 • Letter: 1
Question
1
Consider the following facts:
- On January 1, 2015, Company A had 21,000 shares of common stock outstanding.
- On May 1, 2015, it issued an additional 4,500 shares of common stock.
- In 2015, the company paid a cash dividend of $45,000.
- In 2015, the company earned $375,000.
For the year ended 2015, the basic earnings per share for the company is $ ________.
$17.86
$12.50
$14.63
None of these answers are correct.
$13.75
2
Jackson Company issues $10,000,000, 7.8%, 20-year bonds to yield 8% on January 1, 2014. Interest is paid on June 30 and December 31. The proceeds from the bonds are $9,802,072. What is interest expense for 2015, using straight-line amortization?
$1,026,805
$784,596
None of these answers are correct
$889,896
$780,000
3
At the beginning of 2014, a company issued 10% bonds with a face value of $2,000,000. These bonds mature in five years, and interest is paid semiannually on June 30 and December 31. The bonds were sold for $1,852,800 to yield 12%. The company uses a calendar-year reporting period. Using the effective-interest method of amortization, what amount of interest expense should be reported for 2014? (Round your answer to the nearest dollar.)
$222,333
$221,667
None of these answers are correct
$223,006
$229,440
4
Consider the following facts:
- In 2014, Company A had net income of $210,000.
- Its interest expense for the year was $60,000.
- Its tax expense for the year was $90,000.
What was Company A's times interest earned ratio for 2014?
4.5
None of these answers are correct
3.5
6.0
5.0
5
A company issued bonds with a maturity amount of $200,000 and a maturity ten years from date of issue. If the bonds were issued at a premium, this indicates that
None of these answers are correct
the effective yield or market rate of interest exceeded the stated (nominal) rate.
the market and nominal rates coincided.
no necessary relationship exists between the two rates.
the nominal rate of interest exceeded the market rate.
Explanation / Answer
1. EPS= (net income-prefered div)/ no. of shares outstanding= (375000+45000)/(21000+4500)=420000/25500
= 16.47
net income should be inclusive of cash dividend paid for common stock but exclusive of dividend paid to refered stock
2.Future value: $100,00,000 (The face value of the bonds).
Number of periods: 40(20 years of semiannual payments).
Payment: $375,000 (3.75 semiannual coupon multiplied by the face value).
Rate: 4% (8% yield-to-maturity divided by two semiannual periods).
discount= 10,000,000- $9,802,072=197928$
To calculate the interest expense for the first period, we take the $9,802,072 carrying value of the bonds and multiply it by half the yield-to-maturity. This results in$9,802,072*(0.08/2)=$392,082.88 of interest expense for the first semiannual period.
The actual cash interest paid was only $375,000 -- the coupon multiplied by the bond's face value. However, interest expense also includes the $17082.88 of amortized discount in the first six months.
3.
4.interest earned ratio= EBIT/ interest expense= (210000+90000+60000)/60000=360000/60000= 6 times
5.To better explain this, let's look at an example. Imagine that the market interest rate is 3% today and you just purchased a bond paying a 5% coupon with a face value of $1,000. If interest rates go down by 1% from the time of your purchase, you will be able to sell the bond for a profit (or a premium). This is because the bond is now paying more than the market rate (because the coupon is 5%). The spread used to be 2% (5%-3%), but it's now increased to 3% (5%-2%). This is a simplified way of looking at a bond's price, as many other factors are involved; however, it does show the general relationship between bonds and interest rates.
As for the attractiveness of the investment, you can't determine whether a bond is a good investment solely based on whether it is selling at a premium or a discount. Many other factors should affect this decision, such as the expectation of interest rates and the credit worthiness of the bond itself.
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