ACG 3173 -Exam 3 Ucf Study Guide
Questions with Actual Detailed
Answers.
If the ending inventory of a firm is overstated by $51,000, by how much and in what direction
(overstated or understated) will the firm's operating income be misstated? - Answer
Operating income will be overstated by 51000
leverage can be defined as the use of ________ or fixed _______ to maximize returns. - Answer
debt or fixed costs
It's important to note that an advantage of using debt rather than stock to raise capital is: -
Answer that interest (paid on debt) is tax deductible (company pays less taxes) whereas
dividends paid to stockholders are not (this is really important!).
However, the deductibility of interest has changed under the new tax laws so it's not quite as
advantageous as it used to be. The disadvantage of using debt, as you know by now, is that it
makes your business more risky.
If a corporation distributes dividends to the owners, they (stockholders) must report and pay
personal income tax on these amounts. And because dividends, unlike salaries and bonuses, are
not tax-deductible, the corporation must also pay taxes on them.
basically this is the part of the income statement where your EBIT has the interest subtracted
from it then the dividends added to it to find your total taxable income (interest is a minus so its
not included in your taxes basically)
what are Coupon bonds - Answer bonds that make periodic payments
What is a bond indenture? - Answer A bond indenture is a legal document or contract
between the bond issuer and the bondholder that records the obligations of the bond issuer
and the benefits owed to the bondholder.
basically a contract that contains all the features of the bond
4 key features of how bonds are presented on financial statement - Answer Face value
(usully 1k) - the amount the investor will receive at maturity date
,coupon rate- used to determine coupon/periodic payment
Bond date(payment date/issuance date)
Maturity date (when the bond is due/length of the bond)
1000 face value bond with an 8% coupon rate, with semi annual payments,
what are the cash flows the investor can expect from this bond - Answer given that it is semi
annual payments, 1000 x 8% = $80 per year
80/2 (semiannual) = $40 per 6 mth payment
the investor can also expect to receive 1000 back at the maturity date
What is the coupon rate? - Answer just the annual coupon payments paid by the issuer
relative to the bond's face value
(how bonds effect F/S when first issued eg)
Matrix inc issued the following bonds:
Par value = 1500000 (1500 bonds @ 1000 face v)
Stated interest rate(coupon rate) = 10%
Market interest rate = 10%
semiannual
5 years to maturity
how is the balance sheet effected when these are issued? - Answer market coupon rate =
stated coupon rate****
Debit 1.5 mil (receiving that cash from investors)
credit bonds payable 1.5 mil
,When the price/face value/coupon rate of a bond is above the market rate, bonds are sold for at
_________
When the price/face value/coupon rate is equal to the market rate, bonds are sold at ________
When the price/face value/coupon rate of a bond is sold below the market rate, bonds are sold
at ___________ - Answer A premium (price/ face value/rate > Market)
Par value/ face ammount (face value/rate = Market)
A discount (face value of bond/rate < Market)
Market rate "in the real world" is also called what? - Answer Yield to maturity
Lets say you have a bond with a 1k face value and 10% coupon rate, if you paid less than 1000
for the bond, will your yield to maturity be higher or lower than 10%? describe why - Answer
so 1000 bond with 10% means
$100 coupon payments
so basically (no matter what you paid for it) you will still receive your 100 payments and 1000
bond at the end
but, given in this problem that you paid less for it, your yield to maturity will be higher than 10%
(because you are making more than 10% of what YOU/the investor paid for the bond)
(in general the opposite is also true, if you pay over the face value (1k) then you are receiving
less than 10% yied to maturity
As the prices go up, ______ goes down for a bond issuance - Answer yield to maturity
eg) for how F/S effected:
Matrix inc issued the following bonds:
, Par value = 1500000 (1500 bonds @ 1000 face v)
Stated interest rate(coupon rate) = 10%
Market interest rate = 12%**
semiannual
5 years to maturity
how is the balance sheet effected when these particular bonds are issued? dont need exact
numbers just know what to debit/credit - Answer Given that the stated interest rate is
BELOW the market interest rate, the company is selling these at a discount (coupon/stated <
market)
On the F/S it looks like: ***dont know how he got these numbers maybe gotta find out (most
important thing to know is the format of when they are issued at a discount)
Debit cash 1,389,608
debit discount on bonds payable 110,392
credit bonds payable 1,500,000
***the discount on bonds payable account is a conta liability account (thats why when u
subtract 1.5mil-110,392 (discount) = cash initially received 1389608
The discount on bonds payable account is what type of account? - Answer Contra liability
account
eg) for how F/S effected:
Matrix inc issued the following bonds:
Par value = 1500000 (1500 bonds @ 1000 face v)
Stated interest rate(coupon rate) = 12%
Market interest rate = 10%**
Questions with Actual Detailed
Answers.
If the ending inventory of a firm is overstated by $51,000, by how much and in what direction
(overstated or understated) will the firm's operating income be misstated? - Answer
Operating income will be overstated by 51000
leverage can be defined as the use of ________ or fixed _______ to maximize returns. - Answer
debt or fixed costs
It's important to note that an advantage of using debt rather than stock to raise capital is: -
Answer that interest (paid on debt) is tax deductible (company pays less taxes) whereas
dividends paid to stockholders are not (this is really important!).
However, the deductibility of interest has changed under the new tax laws so it's not quite as
advantageous as it used to be. The disadvantage of using debt, as you know by now, is that it
makes your business more risky.
If a corporation distributes dividends to the owners, they (stockholders) must report and pay
personal income tax on these amounts. And because dividends, unlike salaries and bonuses, are
not tax-deductible, the corporation must also pay taxes on them.
basically this is the part of the income statement where your EBIT has the interest subtracted
from it then the dividends added to it to find your total taxable income (interest is a minus so its
not included in your taxes basically)
what are Coupon bonds - Answer bonds that make periodic payments
What is a bond indenture? - Answer A bond indenture is a legal document or contract
between the bond issuer and the bondholder that records the obligations of the bond issuer
and the benefits owed to the bondholder.
basically a contract that contains all the features of the bond
4 key features of how bonds are presented on financial statement - Answer Face value
(usully 1k) - the amount the investor will receive at maturity date
,coupon rate- used to determine coupon/periodic payment
Bond date(payment date/issuance date)
Maturity date (when the bond is due/length of the bond)
1000 face value bond with an 8% coupon rate, with semi annual payments,
what are the cash flows the investor can expect from this bond - Answer given that it is semi
annual payments, 1000 x 8% = $80 per year
80/2 (semiannual) = $40 per 6 mth payment
the investor can also expect to receive 1000 back at the maturity date
What is the coupon rate? - Answer just the annual coupon payments paid by the issuer
relative to the bond's face value
(how bonds effect F/S when first issued eg)
Matrix inc issued the following bonds:
Par value = 1500000 (1500 bonds @ 1000 face v)
Stated interest rate(coupon rate) = 10%
Market interest rate = 10%
semiannual
5 years to maturity
how is the balance sheet effected when these are issued? - Answer market coupon rate =
stated coupon rate****
Debit 1.5 mil (receiving that cash from investors)
credit bonds payable 1.5 mil
,When the price/face value/coupon rate of a bond is above the market rate, bonds are sold for at
_________
When the price/face value/coupon rate is equal to the market rate, bonds are sold at ________
When the price/face value/coupon rate of a bond is sold below the market rate, bonds are sold
at ___________ - Answer A premium (price/ face value/rate > Market)
Par value/ face ammount (face value/rate = Market)
A discount (face value of bond/rate < Market)
Market rate "in the real world" is also called what? - Answer Yield to maturity
Lets say you have a bond with a 1k face value and 10% coupon rate, if you paid less than 1000
for the bond, will your yield to maturity be higher or lower than 10%? describe why - Answer
so 1000 bond with 10% means
$100 coupon payments
so basically (no matter what you paid for it) you will still receive your 100 payments and 1000
bond at the end
but, given in this problem that you paid less for it, your yield to maturity will be higher than 10%
(because you are making more than 10% of what YOU/the investor paid for the bond)
(in general the opposite is also true, if you pay over the face value (1k) then you are receiving
less than 10% yied to maturity
As the prices go up, ______ goes down for a bond issuance - Answer yield to maturity
eg) for how F/S effected:
Matrix inc issued the following bonds:
, Par value = 1500000 (1500 bonds @ 1000 face v)
Stated interest rate(coupon rate) = 10%
Market interest rate = 12%**
semiannual
5 years to maturity
how is the balance sheet effected when these particular bonds are issued? dont need exact
numbers just know what to debit/credit - Answer Given that the stated interest rate is
BELOW the market interest rate, the company is selling these at a discount (coupon/stated <
market)
On the F/S it looks like: ***dont know how he got these numbers maybe gotta find out (most
important thing to know is the format of when they are issued at a discount)
Debit cash 1,389,608
debit discount on bonds payable 110,392
credit bonds payable 1,500,000
***the discount on bonds payable account is a conta liability account (thats why when u
subtract 1.5mil-110,392 (discount) = cash initially received 1389608
The discount on bonds payable account is what type of account? - Answer Contra liability
account
eg) for how F/S effected:
Matrix inc issued the following bonds:
Par value = 1500000 (1500 bonds @ 1000 face v)
Stated interest rate(coupon rate) = 12%
Market interest rate = 10%**
