Exercise 15-4 (Essay) Faith Evans Corporation is a regional company which is an

Question

Exercise 15-4 (Essay) Faith Evans Corporation is a regional company which is an SEC registrant. The corporation's securities are thinly traded on NASDAQ. Faith Evans Corp. has issued 10,000 units. Each unit consists of a $500 par, 12% subordinated debenture and 10 shares of $5 par common stock. The units were sold to outside investors for cash at $880 per unit. Prior to this sale, the 2-week ask price of common stock was $40 per share. Twelve percent is a reasonable market yield for thee debentures, and therefore the par value of the bonds is equal to the fair value. (b) Briefly explain which method (incremental or proportional) is, in your opinion, the better method.

Explanation / Answer

Exercise-15-4

(b) In my opinion, in this case propotional method is better because incremental method suits where the fair market value of securities is unknow but in this case it is known to us so the propotional method suits in this case .

Exercise-15-5

(a) Cash(164*500) 82000

common stock(500*10) 5000

paid additional for common stock 77000

Cash(100*205) 20500

preferd stock(100*100) 10000

paid additional for preferd stock 10500

(b) cash(500*178) 89000

common stock(500*10) 5000  

paid additional for common stock 84000

cash 104000

prefered stock 100000

paid additional prefered stock 4000

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