Question

a) Unpaid and undeclared preferred dividends are debts of the issuing firm. True False

b) If interest rates fall, the price of noncallable bonds will move up higher than that of comparable callable bonds.

None of the above

True

False

Uncertain

Uncertain

C) Ulrich Inc.'s articles of incorporation authorize the firm to issue 500,000 shares of $5 par value common stock, of which 410,000 shares have been issued by the company. The shares were issued at an average premium of 30% over the par value. Calculate the capital in excess of par value on the company's balance sheet.

$2,665,000

$3,250,000

$615,000

None of the above

Answer 1

Solution:

a) Unpaid and undeclared preferred dividends are debts of the issuing firm.( True )

- The unpaid and undeclared dividends are debts since the issuing firms are bound to pay dividends compulsorily and they are liability even if not declared or paid.  

b) If interest rates fall, the price of noncallable bonds will move up higher than that of comparable callable bonds. (True)

- If the interest rates fall, then in such cases the firms may choose to call off their callable bonds because the firm can issue new debt, receiving a lower interest rate than the original callable bond. Therefore, the non- callable bond prices move higher in comparison to callable bonds, when interest rates fall.

c) Authorize Capital: 500,000 shares, Par Value: $5, Issued Shared: 410,000 shares

Call Premium: 30% of Par Value , hence Call premium: $ 5*30% = $ 1.50

Capital in excess of Par Value on the Balance Sheet: Capital including Premium - Capital without premium

Capital in excess of Par Value on the Balance Sheet: 410,000 * ($ 5+ $ 1.50) - 410,000 * $ 5

Capital in excess of Par Value on the Balance Sheet: 2,665,000 - 2,050,000 = $ 615,000

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