A. rise as the maturity date approaches.

B. decline as the maturity date approaches.

C. remain constant throughout the life of the bond.

7. Fairmont Golf issued fi xed rate debt when interest rates were 6 percent. Rates have since

risen to 7 percent. Using the values reported on the fi nancial statements would most

likely cause an analyst to

A. overestimate Fairmont ’ s economic liabilities.

B. underestimate Fairmont ’ s economic liabilities.

C. underestimate Fairmont ’ s interest coverage ratio.

8. Debt covenants are least likely to place restrictions on the issuer ’ s ability to

A. pay dividends.

B. issue additional debt.

C. issue additional equity.

9. Sheila Cummins is analyzing the fi nancial statements of a company that has issued

convertible bonds that are currently reported as debt. Cummins is considering potential

adjustments to the debt - to - equity ratio as part of her analysis. The least appropriate

action would be to

A. make no adjustment.

B. adjust debt but not equity.

C. adjust equity but not debt.

10. Why - Fi Incorporated reports total equity of $10 million. It has also issued convertible

bonds with a book value of $10 million that are convertible into equity with a current

market value of $15 million. Under U.S. GAAP, if the bonds are converted, Why - Fi will

report total equity closest to

A. $10 million.

B. $20 million.

C. $25 million.

11. When analyzing the fi nancial statements of Energy Resources, Inc., Frederico

Montalban, CFA, is treating its convertible bonds issue as equity rather than debt.

Montalban ’ s analysis is most likely appropriate

A. if the conversion price is near the current market price of the stock.

B. if the conversion price is signifi cantly above the current market price of the stock.

C. if the conversion price is signifi cantly below the current market price of the stock.

12. Capitol Services Corp. has $300 million in shareholders ’ equity and $400 million in

long - term debt, of which $200 million are convertible bonds. What would Capitol ’ s

long - term debt - to - equity ratio be if the bonds were converted?

A. 0.40

B. 0.80

C. 0.67

13. Assets that are being used under a synthetic lease are reported as though the lessee owns

them

A. for tax purposes and on the fi nancial statements.

B. on the fi nancial statements but not for tax purposes.

C. for tax purposes but not on the fi nancial statements.

14. Compared to using a fi nance lease, a lessee that makes use of an operating lease will

report higher

A. debt.

B. rent expense.

C. cash fl ow from operating activity.

15. The notes to the fi nancial statements of Bargain Apparel Corp. disclose that the company

has fi nance lease commitments with minimum future payments of $20 million,

of which $6 million represents interest payments. It also has operating leases with minimum

future payments of $25 million. If Robert Xu, CFA, wishes to adjust the fi nancial

statements to treat all leases as debt, he should increase reported total liabilities by an

amount closest to

A. $17.5 million.

B. $25.0 million.

C. $45.0 million.

16. Compared to an identical company that uses an operating lease, a company that uses a

fi nance lease will most likely produce a reported return on equity (ROE) that

Date: 2016-03-03; view: 598