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purchased. The equ:

purchased. The equ:

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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pon rate of 9% and $50 milll8N UI TIU bonds have the same maturity. Because the convertible issue has the lower coupon uth it less risky than the nonconvertible bond? Would you regard the cost of capital as e, is • DotK it might appear at first glance that the convertible's cost of capital is lower, this igh necessarily the case, because the interest rate on the convertible understates its true ot Think about this.) LEASING Cordell Construction needs a piece of equipment that can be leased or purchased. The equipment costs $100. One option is to borrow $100 from the local bank and use the money to buy the equipment. The other option is to lease the equipment. The company's balance sheet prior to the equipment purchase or lease is shown below: 20-1 Current assets $300 Debt $350 Fixed assets 400 Equity 350 Total assets $700 Total liabilities and equity $700 What would be the company's debt ratio if it chose to purchase the equipment? What would be the company's debt ratio if it leased the equipment and it could keep the lease off its balance sheet? Is the company's financial risk any different whether the equipment is leased or purchased? Explain. WARRANTS Rubash Company recently issued two types of bonds. The first issue consi ed of 20-year straight (no warrants attached) bonds with a 9% annual coupon. The seco issue consiste 20-2
Transcribed Image Text:pon rate of 9% and $50 milll8N UI TIU bonds have the same maturity. Because the convertible issue has the lower coupon uth it less risky than the nonconvertible bond? Would you regard the cost of capital as e, is • DotK it might appear at first glance that the convertible's cost of capital is lower, this igh necessarily the case, because the interest rate on the convertible understates its true ot Think about this.) LEASING Cordell Construction needs a piece of equipment that can be leased or purchased. The equipment costs $100. One option is to borrow $100 from the local bank and use the money to buy the equipment. The other option is to lease the equipment. The company's balance sheet prior to the equipment purchase or lease is shown below: 20-1 Current assets $300 Debt $350 Fixed assets 400 Equity 350 Total assets $700 Total liabilities and equity $700 What would be the company's debt ratio if it chose to purchase the equipment? What would be the company's debt ratio if it leased the equipment and it could keep the lease off its balance sheet? Is the company's financial risk any different whether the equipment is leased or purchased? Explain. WARRANTS Rubash Company recently issued two types of bonds. The first issue consi ed of 20-year straight (no warrants attached) bonds with a 9% annual coupon. The seco issue consiste 20-2
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