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Basic Question 1 of 4
The bond indenture specifies that the 8% issue due June 2017 of Canton Corp. is redeemable in the event of a merger at par value. The bond is callable after December 31, 2012 at 103. In the event of a merger between Canton Corp and a suitor company owners of this issue will receive
B. par value
C. 103% of par value
A. the market price
B. par value
C. 103% of par value
User Contributed Comments 7
| User | Comment |
|---|---|
| stranger | a. high effective rates means borrowing is expensive and PV of capital lease is lower: firm wud use CL b. firm wud use: better option than borrowing c. less debt: firm wud add CL, adding some more debt d. THIS IS UNFAVORABLE HENCE FIRM WUD NOT USE CL |
| kalps | High effective tax rate means that operating lease payments would reduce profits and therefore tax - which is also positive. However the answer is also correct in that gearing will increase with higher debt as the capital lease is effectively put on the balance sheet as debt |
| Gina | why does a high effective tax rate increase the cost of borrowing? |
| mtcfa | My take on the high effective tax rates is that a firm would prefer a capital lease because, in addittion to the interest expense, the firm can also deduct depreciation, and at least save in taxes in the early years. I'm not sure it has anything to do with the cost of borrowing. |
| gill15 | High effective tax rates --- What does this mean? We want low Pretax Income to be taxed. How do we accomplish this? We would want own the items and have them depreciate --- High effective tax rates --- want depreciation X to lower our profits --- need a capital lease. |
| gill15 | Also from the borrowers end -- High effective tax rate would mean high borrowing from the bank, so get a capital lease from the lessor at a lower rate. |
| Shaan23 | What I didnt understand was who the firm is(Lessee or the Lessor). Depending on who it is the answer is different. |
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Learning Outcome Statements
identify financial reporting choices and biases that affect the quality and comparability of companies' financial statements and explain how such biases may affect financial decisions;
evaluate the quality of a company's financial data and recommend appropriate adjustments to improve quality and comparability with similar companies, including adjustments for differences in accounting standards, methods, and assumptions;
evaluate how a given change in accounting standards, methods, or assumptions affects financial statements and ratios;
analyze and interpret how balance sheet modifications, earnings normalization, and cash flow statement related modifications affect a company's financial statements, financial ratios, and overall financial condition.
CFA® 2025 Level II Curriculum, Volume 2, Module 15.