3rd Edition

ISBN: 9780078025549

Author: J. David Spiceland, Wayne M Thomas, Don Herrmann

Publisher: McGraw-Hill Education

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Textbook Question

Chapter 9, Problem 9.6AP

Explore the impact of leases on the debt to equity ratio (LO9–3, LO9–8)

Thrillville has $41 million in bonds payable. One of the contractual agreements in the bond indenture is that the debt to equity ratio cannot exceed 2.0. Thrillville’s total assets are $81 million, and its liabilities other than the bonds payable are $11 million. The company is considering some additional financing through leasing.

Required:

1. Calculate total stockholders’ equity using the balance sheet equation.

2. Calculate the debt to equity ratio.

3. Explain the difference between an operating lease and a capital lease.

4. The company enters a lease agreement requiring lease payments with a present value of $16 million. Will this lease agreement affect the debt to equity ratio differently if the lease is recorded as an operating lease versus a capital lease?

5. Will entering into the lease cause the debt to equity ratio to be in violation of the contractual agreement in the bond indenture? Show your calculations (a) assuming an operating lease and (b) assuming a capital lease.

Definition Definition Financial statement that provides a snapshot of an organization's financial position at a specific point in time. It summarizes a company's assets, liabilities, and shareholder's equity, detailing what the company owns, what it owes, and what is left over for its owners. The balance sheet serves as a crucial tool to assess the financial health and stability of a company, as well as to help management make informed decisions about its future investments and financial obligations.

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Chapter 9, Problem 9.5AP

Chapter 9, Problem 9.7AP

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Chapter 9 Solutions

Financial Accounting

Ch. 9 - What is capital structure? How do the capital...Ch. 9 - Prob. 2RQ Ch. 9 - What are bond issue costs? What is an underwriter?Ch. 9 - Why do some companies issue bonds rather than...Ch. 9 - Prob. 5RQ Ch. 9 - What are convertible bonds? How do they benefit...Ch. 9 - How do we calculate the issue price of bonds? Is...Ch. 9 - Prob. 8RQ Ch. 9 - If bonds issue at a discount, is the stated...Ch. 9 - Prob. 10RQ

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Solution Summary: The author explains the difference between an operating lease and a capital lease.

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