Beechy6eVol2 SM Ch15 Essay examples

From the above tables TABLE 2 (new 10% subordinated debentures) and TABLE 3 (existing 5% convertible debentures) the present values of the exchanged 10% subordinated debentures and the existing 5% convertible debentures are obtained.

E5-2 (Classification of Balance Sheet Accounts) Presented below are the captions of Nikos Company’s balance sheet.

When the debt instrument and the option to acquire common stock are inseparable, as in the case of convertible bonds, the entire proceeds of the bond issue are allocated to the debt and the related premium or discount accounts.

o Cost of debt in this case is 12.5% though MCI can raise $ 100 million more with this option in comparison to option (a) above. Servicing this debt would be a significant drain on the cash flow. o Please see Exhibit 3. (c) $600 million Convertible offering @ 7.625% 20 year with conversion at 54 per share o Using this option MCI can raise $ 100 million more than option (b) at 4.88% lower rate of interest. It also gives MCI an option to convert it to equity once the stock price reaches 54 (it is currently 47). Based on previous convertible offerings (As per exhibit 6 of case, 1978, 1979, 1980, 1981 and 1982), MCI has been converting it to equity within 18 months because of its high growth. As higher growth is projected for the next few years (Exhibit 9 of case), MCI is expected to convert this $600 million offering to equity, thereby reducing its leverage. o This option allows to finance its current activities and match capital inflows with expected investment outlays in the near future. It also allows MCI the option to eliminate the cash flow drain from servicing the debt once the stock price increases. o As per Exhibit 3 attached here, this offering will provide capital to meet the external financing needs for 1983.

There are two main characteristics of the Series B Preferred Stock that behave like equity- the voting rights and conversion option. The host contract gives voting rights- which behave like equity. While voting rights fall into the equity category, these are not full voting rights. The voting rights allow the Series B preferred stockholders to vote with common stockholders only for significant events. These voting rights are therefore not full voting rights which means this characteristic is not given its full weight as being toward equity. The conversion option shows signs of equity; however, it also shows signs of debt. Since the conversion option is weighted equally for equity and debt, it essentially cancels itself in determining whether the host contract is debt or equity.

Stock options and warrants give the holder the right to purchase a share of stock at a predetermined price within a given time period. According to Richard G Schroeder in the textbook Financial Accounting Theory and Analysis: Text and Cases, under current GAAP the cash inflow received from these securities needs to be reported as equity. The value reported in subsequent periods is historical and does not change in response to changes in the market value of these securities.

(c) Issued $200,000 par value common stock upon conversion of bonds having a face value of

A stock option gives any employee the right to buy a certain number of shares in the company at a fixed price for a certain number of years. Employees who have been given the choice of stock options hope that the share price will go up and that they will be able to cash in by purchasing the stock at the

Based on the concept of stock appreciation rights and stock option plans, the following are some of the benefits that the company is likely to accrue.

In fact, bond investments are carried out in several ways, depending on the type of bond:

Though being in practice for a long duration, foreign currency convertible bonds (FCCB) have become very popular while raising funds at competitive rates. In India foreign currency convertible bonds (FCCB) are considered as foreign direct investment (FDI) by the government of India. Foreign currency convertible bonds (FCCB) are the more modern method of raising money for the company, which takes advantage of the economies being truly global. Also factors like government policies and regulation, exchange rate, and cost of conversion to stock/equity may influence investor’s decision to swap foreign currency convertible bonds (FCCB) into

2. Refinanced, or retired from the proceeds of a new debt issue, or 3. Converted into capital stock.

An arrangement may also involve debenture holders being given an extension of time for payment, releasing their security in whole or in part or exchanging their debentures for the claims and the balance in shares or debenture of the company; preference shareholders giving up their rights to arrears of debenture of the company; preference shareholders giving up their rights to arrears of the dividends, further agreeing to accept a reduces rate of dividend in the future,

It enables issue of shares to debenture holders in exchange of the amount due to them, where the terms of issue of debentures provide for such an exchange and such terms are approved both by the special resolution of the general meeting and by the Central Government. Joint Stock Companies can issue either non-convertible or convertible debentures. Convertible debentures are further classified as

▪ Convertible ( options that you have to exchange) and with warrants (similar to a bond it is a stock option give the right to purchase the underline number of chairs , bonds…)