On January 1, 2017, Carla Company purchased 11% bonds, having a maturity value of $274,000, for $295,314.87. The bonds provide the bondholders with a 9% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Carla Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows.

On January 1, 2017, Pharoah Company purchased 12% bonds, having a maturity value of $320,000, for $344,260.74. The bonds provide the bondholders with a 10% yield. They are dated January 1, 2017, and mature January 1, 2022, with interest received on January 1 of each year. Pharoah Company uses the effective-interest method to allocate unamortized discount or premium. The bonds are classified as available-for-sale category. The fair value of the bonds at December 31 of each year-end is as follows. 2017 $342,000 2020 $330,700 2018 $329,700 2021 $320,000 2019 $328,700 (a) Prepare the journal entry at the date of the bond purchase. (b) Prepare the journal entries to record the interest revenue and recognition of fair value for 2017. (c) Prepare the journal entry to record the recognition of fair value for 2018.

The following is a four- year forecasted estimate for ABC limited.

Required

1. Estimate the fair market value of ABC limited at the end of 2018. Assume that after 2022 earnings before interest and tax will remain constant at Sh. 200 million, depreciation will equal capital expenditure in each year and working capital will not change. The weighted average cost of capital for the company is 11% and its tax rate is 30%.

2. Estimate the fair market value per share of the company’s equity at the end of 2018 if the company has 40 million shares outstanding and the market value of interest-bearing liabilities on the valuation date equals Sh. 300 million. (10 Marks)

Trident Corporation is currently worth $16 million. Its current debt-to-value (D/V) ratio is 60%. The company is confident in meeting its debt obligation, and wants to introduce more debt to take advantage of the tax shield of interest payment. It is planning to repurchase part of the common stock by issuing more corporate debt. As a result, the firms debt value is expected to rise by $1.4 million. The cost of debt is 8 percent per year. Trident expects to have an EBIT of $2.4 million per year in perpetuity. Tridents tax rate is 30%.

(a) What would be the market value of Trident Corporation if it were unlevered? What would be the expected return on equity if Trident were an all-equity firm?

(b) What is the expected return on the firms equity before the announcement of the stock repurchase plan?

(c) What is the value of equity after the announcement of the stock repurchase plan? How much money do the equityholders expect to receive each year under the new capital structure? What is the expected return on the firms equity after the announcement?

(d) How much does the value of the firm increase after the announcement? If the goal is to maximize the firms value, would you recommend the CEO of Trident to borrow as much as they can? Please explain your rationale. Ignore the cost of financial distress and agency cost.

(e) Now we consider the downside of debt borrowing: cost of financial distress and agency cost. The more debt there is, the more costly it could be when the firm fails to meet its debt obligation. Suppose the firm expects to incur an additional cost of $360,000 for this $1.4 million increase in leverage. If the goal is to maximize the firms value, would you recommend the CEO of Trident to proceed with this repurchase plan? Please explain your rationale.

Tiger Enterprises has, for several years, enjoyed relatively easy access to the bond markets. Their President/CEO is wondering whether they may have taken too much advantage of their access and borrowed more than they should have.

Tiger's debt ratio is currently 68%. If it reaches 70%, holders of certain bonds will be able to force a conversion of their bonds to common stock. This will significantly dilute the ownership of several major investors. Their long-term debt is currently structured as follows:

$5,000,000 of 4.2%, 20-year bonds due in 2035, book value is $4,800,000

$8,000,000 of 4%, 20-year bonds due in 2036, book value is $7,510,000

$20,000,000 of 5%, 20-year convertible bonds due in 2037, book value is $17,800,000

$10,000,000 of 4.8%, 30-year bonds due in 2048, book value is $8,100,000

Tiger has a current cash balance of approximately $10,000,000, which is $6,000,000 more than they consider to be the minimum cash balance that allows them to carry on operations smoothly. There are no short-term investments. Their major lines of business all generate positive operating cash flows and are expected to continue to do so.

Required: In preparation for next week’s board meeting, the CEO has asked you to draft a plan to bring the debt ratio down below 50% in the next two years. Identify at least one approach that will reduce the debt ratio in two years. If there is additional information, you need to formalize your plan, indicate what information you need. Consider how the Balance Sheet will look at the level of Assets = Liabilities+Equity. Use rough amount estimates if needed and work the debt ratio down from there. What changes would be required for this and how will the company implement those changes?

West Coast Tours runs boat tours along the west coast of British Columbia. On March 5, 2020, it purchased, with cash, a cruising boat for $846,000, having a useful life of 10 years or 12,900 hours, with a residual value of $201,000. The company’s year-end is December 31.

Required:
Calculate depreciation expense for the fiscal years 2020, 2021, and 2022 by completing a schedule. (Note: Depreciation is calculated to the nearest month. Assume actual hours of service were: 2020, 750; 2021, 1,810; 2022, 1,565.)

Martinez Corporation prepared the following reconciliation for its first year of operations:

The temporary difference will reverse evenly over the next two years. The enacted tax rate for 2020 and future years is 20%. The amount reported as net deferred income taxes on Martinez's balance sheet at December 31, 2020, should be a Deferred Tax  of $   .

Provide whether the balance sheet account is a Deferred Tax "Asset" or "Liability" and the value.

A company's net income for 2020 is $50,000. It has 2,000 stock options outstanding. These options were issued during 2019, each exercisable for one share at $37. None has been exercised. 40,000 shares of common were outstanding during 2020. Suppose the average market price of the company’s stock during 2020 can be 44, 46, 27, or 54. For which average market price will these stock options be antidilutive? Please enter one (and only one) of the average market prices provided by the problem.

A company's net income for 2020 is $50,000. It has 2,000 stock options outstanding. These options were issued during 2019, each exercisable for one share at $37. None has been exercised. 40,000 shares of common were outstanding during 2020. Suppose the average market price of the company’s stock during 2020 can be 44, 46, 27, or 54. For which average market price will these stock options be antidilutive? Please enter one (and only one) of the average market prices provided by the problem.