[13] True or False (Provide explanation). Stockholders face limitless liability for the company s loans while bondholders may only lose the value of their investment should the company enter bankruptcy.
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[13] True or False (Provide explanation). Stockholders face limitless liability for the company s loans while bondholders may only lose the value of their investment should the company enter bankruptcy.
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- Which of the following statements is CORRECT? a. Sinking fund provisions never require companies to retire their debt; they only establish "targets" for the company to reduce its debt over time. b. Most sinking funds require the issuer to provide funds to a trustee, who holds the money so that it will be available to pay off bondholders when the bonds mature. c. Sinking fund provisions sometimes turn out to adversely affect bondholders, and this is most likely to occur if interest rates decline after the bond was issued. d. If interest rates increase after a company has issued bonds with a sinking fund, the company will be less likely to buy bonds on the open market to meet its sinking fund obligation and more likely to call them in at the sinking fund call price. e. A sinking fund provision makes a bond more risky to investors at the time of issuance.Under which of the following situation, would a firm most likely to call its outstanding callable bonds? Group of answer choices a)The firm has financial distress. b)The company’s bonds are downgraded. c)The market interest rate increases d)The market interest rate declinesMf2 Corporate debt can be dependable or risky, which depends on the value and the risk of the firm's assets. Bondholders can take steps to eliminate default risk. A) correct B) mistake
- 10. LO 12.3If a bankruptcy is deemed likely to occur and is reasonably estimated, what would be the recognition and disclosure requirements for the company?True or False. 1. If the amount of the bond payable is fully paid, together with the interest, the liability of the issuing entity ceases to exist. 2. Debt equity is raising capital through the creation of a liability. 3. In equity financing, there is debtor and creditor relationship. 4.An investor that owns convertible bonds in a deteriorating company would realize a higher return on his/her investment by converting the bond immediately before bankruptcy. True or False.
- 3. a. List and describe three types of deferred credits? b. Do they meet the definition of a liability? Of short or long term? c. Why do some accountants not consider them to be a liability? d. Do deferred credits affect liquidity? 4. List and discuss four reasons a company would prefer to issue debt rather than equity securities. 5. When and why should liabilities for each of the following items be recorded on the books of an ordinary business corporation? a. Purchase of goods on account. b. Officers' salaries c. Dividends d. Interest e. Loss contingenciesWhile individual consumers have a credit score, large, publicly-held corporations are not typically rated for default risk True FalseRoss’s Lipstick Company’s long-term debt agreements make certain demands on the business. For example, Ross may not purchase treasury stock in excess of the balance of retained earnings. Also, long-term debt may not exceed stockholders’ equity, and the current ratio may not fall below 1.50. If Ross fails to meet any of these requirements, the company’s lenders have the authority to take over management of the company. Changes in consumer demand have made it hard for Ross to attract customers Current liabilities have mounted faster than current assets, causing the current ratio to fall to 1.47. Before releasing financial statements, Ross’s management is scrambling to improve the current ratio. The controller points out that an investment can be classified as either long-term or short-term, depending on management’s intention. By deciding to convert an investment to cash within one year, Ross can classify the investment as short-term-a current asset. On the controller’s recommendation,…
- Which statement is FALSE regarding the difference between shareholders and bondholders? * Bondholders are mere creditors of the company to whom the company has to repay a certain amount. Shareholders are the real owners in the company. Shareholders have more rights (voting rights, priority at times of bankruptcy, payment preferences) than bondholders. Shareholders are more exposed to risks than bondholders.16. Bonds are a popular source of financing because a.financial analysts tend to downgrade a company that has raised large amounts of cash by frequent issues of shares. b.a company having cash flow problems can postpone payment of interest to bondholders. c.the bondholders can always convert their bonds into shares if they choose. d.bond interest expense is deductible for tax purposes, while dividends paid on shares are not.22.Lower the debt equity ratio A. Lower the protection to creditors B. Higher the protection to creditors C. It does not affect the creditors D. None of the above