【文章內(nèi)容簡介】 reported cash flows of issuing zerocoupon debt. ? Cash flows from financing and operations are affected by the particular bond issued. ? Zerocoupon bonds have no deduction from cash flow from operations even though it has interest expense. All of its cash flows are included in financing activities. ? Any bond issued at a discount will have more cash flow from operations (CFO is overstated) and less cash flow from financing (CFF is understated). ? A bond issued at a premium will have more cash flow from financing (CFF is overstated) and less cash flow from operations (CFO is understated). ? Times interest earned ratio is unaffected (holding the proceeds from the issue constant) although times interest earned on a cash basis is affected. c: Compute and describe the effects of the issuance and the conve rsion of convertible bonds, warrants, and convertible preferred stock on financial statements and ratios. Example: Given the following financial position: Assets: $100,000 Liabilities: $ 50,000 Stockholders’ Equity: $ 50,000 So debt/equity = 1. If $50,000 of convertible debt is issued, then liabilities will be $100,000 and the debtequity ratio will increase to . Interest expense will reduce ine. If $50,000 is received from the issue of debt with stock warrants and the warrants are valued at $10,000 ($40,000 associated with the debt), then liabilities will be $90,000 and equity will be $60,000. The debtequity ratio will increase (90,000/60,000). If $50,000 of nonredeemable preferred stock is issued, then stockholders’ equity will be $100,000 and the debtequity ratio will decrease to . If $50,000 of redeemable preferred stock is issued, then stockholders’ equity will be $100,000. But for purposes of analysis, the redeemable preferred stock is treated as if it were debt (its current and arrears dividends as interest). Hence, total liabilities will be $100,000 and the debtequity ratio increases to . d: Discuss the effect of changing interest rates on the market value of debt and on financial statement ratios. Changes in market interest rates lead to changes in the market values of debt. Increases (decreases) in the market rate of interest decreases (increases) the market value of debt. These gains (from the decrease in market value of debt) or losses (from the increase in market value of debt) are not reflected in the financial statements. Hence the book value of debt will not equal the market value. However, for purposes of analysis, market values may be more appropriate than book values. For example, firms that issue debt when interest rates are low are relatively better off when interest rates increase and this increase should be reflected in a higher value of equity and a lower value of debt. Adjusting the firm’s debt down to market value will result in the measurement of debt to what would have to be paid to retire the debt and will decrease the debtequity ratio. If interest rates decrease, the opposite effects will occur from adjusting debt to its market value. e: Explain why the gain or loss resulting from retirement of debt prior to maturity is treated as an extraordinary item. A pany may choose to retire debt prior to maturity because of declining interest rates, increased cash flows (., from the sale of assets), or a decision to change the pany39。s financial leverage. When a firm retires debt prior to maturity there may be a difference between book value and market value. This difference is treated as an extraordinary gain or loss in the ine statement. When a firm replaces a high coupon issue with another issue when interest rates are lower, the firm is no better off as a result of refinancing. In this case, the firm will recognize an immediate extraordinary loss, but will record lower future interest expense. The point is that the amount and timing of the accounting gain and the economic gain may be quite different. : Leases and OffBalance Sheet Debt and Financial Reporting by Lessors and for Sale Leasebacks a: Classify a lease as capital or operating. A lease is a capital lease if just one of the following criteria hold: ? The title is transferred to the lessee at the end of lease period. ? A bargain purchase option exists. ? The lease period is at least 75% of the asset’s life. ? The present value of the lease payments is at least 90% of the fair value of the asset using the minimum of the lessee39。s incremental borrowing rate or the rate implicit in the lease. Note: The implicit rate in the lease is the discount rate that the lessor used to determine the lease payments. It is the discount rate that equates the present value of the lease payments to the fair value of the leased asset. By using the minimum of the two discount rates, the lessee increases the present value of the lease payments and increases the amount of the asset and liability that must be recognized under the capital lease. A lease not meeting any of these criteria is classified as an operating lease and payments made by the lessee are reported as rent expense. b: Calculate the effects of capital and operating leases on financial statements and ratios. Ratios: Capital lease Operating lease Current ratio (CA/CL) Lower Higher Working capital (CACL) Lower Higher Asset turnover (Sales/TA) Lower Higher Return on Assets (EAT/TA) Lower Higher Return on Equity (EAT/E) Lower Higher Debt to Equity (D/E) Higher Lower Statement Totals: Assets Higher Lower Liabilities Higher Lower Net ine (in the early years) Lower Higher Cash flow operations Higher Lower Cash flow financing Lower Higher Total cash flow Same Same c: Discuss the factors that determine whether a pany would tend to favor capital or operating leases. The incentives for structuring a lease as an operating lease are: 1. Tax benefits: If the lessee is in a low tax bracket