51. Based on your answer above, would you consider it more advantageous to borro
ID: 2784709 • Letter: 5
Question
51. Based on your answer above, would you consider it more advantageous to borrow or to issue stock? A. Borrow B. Issue Stock 52. The collapse of Enron in 2001 was due in large part to Enron's participation in and abuse of what? A. Deregulation of the power industry B. Special Purpose Entities C. Hedge Funds D. Investment Tax Credit 53. Bonds rated below Baa are referred to as high-yield or junk bonds. Why is the term high-yield used in this context? A. Typically, these bonds are priced higher than low yield bonds because of the potential for high returns. The IRS provides a higher tax deduction for issuers of these bonds. The issuer must offer a higher coupon rate to offset the risk associated with the issuer's ability to repay the debt The coupon rate is increased each year B. C. D. 54. Flybynight, Inc has just completed their fiscal year and they are concerned about their ongoing financial health. The CFO storms into the office of the Controller, throws the financial statements down in front of him, and tells her that he wants to somehow or another quantify their chances of going bankrupt. The Controller just recently learned how to calculate the Altman Z Score. Assuming the financial statements contain the numbers noted below, calculate Flybynights Altman's Z Score (numbers are in billions except for share price and number of shares) Current Assets-$2.58 Total Assets- $10.08 Current Liabilities $3.1B Total Liabilities $6.0B Retained Earnings- $2.0B Total Sales-$5.0B Earnings (loss) Before Interest and Taxes-($.9B negative) Share Price $0.50/share Shares outstanding- 165 Million Z Score (five-point credit) A. 24 B. 37 C. 42 D. .74 E. 1.82 55. Based on your answer in the preceding problem what range would you say Flybynight's Z Score falls into? A. Distress B. Grey C. Safe D. HyperspaceExplanation / Answer
Q 52 b
Enron used non-consolidated Special Purpose Entities (SPE) to improve it's accounting results rather than operating results.
Q 53 c
these are junk bonds and susceptible to default, hence the investors in these bonds must be given extra incentives in the form of extra return to invest in these bonds.
Q 54 c
Z = 1.2X1 + 1.4X2 + 3.3X3 + 0.6X4 + 1.0X5
X1 = working capital / total assets = (current assets current liabilities) /total assets = (2.5-3.1)/10 = -.06
X2 = retained earnings / total assets = 2/10 = .2
X3 = earnings before interest and taxes / total assets = -.9/10 = -.09
X4 = market value of equity / total liabilities = 165*.5/6000 = 0.01375
X5 = sales / total assets = 5/10 = .5
Z = -1.2*.06 + 1.4*.2 - 3.3*.09 + 0.6*.01375 + 1.0*.5 = -0.072+0.28-0.297+0.00825 +.5 = 0.41925 = .42 appx
Q 55 a
Z < 1.81 means it is in “Distress” Zone
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.