Page 626 - Accounting Principles (A Business Perspective)

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• Finance two-thirds with bonds, one-third with additional stock. The bonds would have a 20-year life, bear
interest at 10 per cent, and sell at face value. The issue price of the stock would be USD 80 per share.
Should the investment be made? If so, explain which financing plan you would recommend. (Hint: Calculate

earnings per share for last year and for future years under each of the alternatives.)
Business decision case B An annual report of a company contained the following paragraph in the notes to
the financial statements:
The 9 7/8 per cent Senior Subordinated Debentures are redeemable at the option of [the company] at 103.635
per cent of the principal amount plus accrued interest if redeemed prior to [a certain date], and at decreasing prices
thereafter. Mandatory sinking fund payments of USD 3,000,000 (which [the company] may increase to USD
6,000,000 annually)...and are intended to retire, at par plus accrued interest, 75 per cent of the issue prior to

maturity.
Answer the following questions:
a. What does the term debentures mean?
b. How much is the call premium initially? Does this premium decrease over time?
c. Under what circumstances might the company want to increase the sinking fund payments?
Business decision case C The Wall Street Journal contained a table showing yield comparisons for groups of
corporate bonds. The following data have been adapted from the table:
Yield Percentage
As of 52-week
4/28 4/27 High Low
Risk category
1-10 year maturities:
High quality 7.08% 6.94% 7.16% 5.32%
Medium quality 7.41 7.26 7.49 5.76
Over 10 year maturities:
High quality 7.91 7.81 8.06 6.93
Medium quality 8.36 8.25 8.49 7.29
High-yield bonds 10.45 10.48 10.53 9.25

Standard & Poor's
ratings were:
High quality AAA to AA
Medium quality A to BBB
High yield BB to C
Prepare written answers to the following questions.
a. In each column of numbers, why do the yield rates increase from top to bottom?
b. For the high quality and medium quality bonds, what could account for the increase in the yield rates from
4/27 to 4/28? Take into consideration possible economic events.
c. Which risk class of bonds was closest to its 52-week high on 4/28? What could have been the cause?
Annual report analysis D Refer to the Annual report appendix and determine the times interest earned ratio
for 2003 for The Limited. Use "operating income" to represent IBIT. Prepare written comments on the results of
your analysis.

Annual report analysis E A recent annual report of Emhart Corporation contained the following paragraph
in its notes to the financial statements:
The 6 3/4 per cent convertible subordinated debentures may be converted into shares of common stock at a
price of USD 26.50 per share at any time prior to maturity. They are redeemable at prices decreasing from 105 per
cent of face amount currently to 100 per cent [at a certain future date].

Accounting Principles: A Business Perspective 627 A Global Text