for a company that needs to borrow the same amount of cash, which of the following statements about the relative impact of issuing interest bearing debt and zero coupon bonds on the financial statements is true: 0 coupon bonds interest bearing debt I. cash from from operations higher lower II cash flow from financing higher lower III balance sheet liability higher lower A. I only B. II only C. I and II only D I and III only ============================================================= which of the following statements on the relative impact on the financial statements of issuing conventional bonds compared to bonds with warrants is true: conventional bonds bonds with warrants I Balance sheet liability higher lower II Net income higher lower III Operating cash flow higher lower A. I only B II only C I and II only … Please provide your reasonings!
A I is correct…0 coupon bonds do not affect CFO. II not correct…CFI is lower because with 0 coupon bond because all “interest” is cash outflow from CFI. III not correct…not sure about this one…but initial balance sheet liability will be lower with 0 coupon bond because it is deeply discounted. Did you forget choice D on the 2nd question? anyhow Ill go with A again…
C A For the second one, bonds will have a greater liability since in case of bonds with warrants, warrant is treated as equity and bond is at a discount.So liability lower for it. INterest expense is lower for bond with warrant than a reg one Since interest s lower cash flow is higher
LongOnCFA Wrote: ------------------------------------------------------- > A > I is correct…0 coupon bonds do not affect CFO. > II not correct…CFI is lower because with 0 > coupon bond because all “interest” is cash outflow > from CFI. > III not correct…not sure about this one…but > initial balance sheet liability will be lower with > 0 coupon bond because it is deeply discounted. > If u want to borrow it is CFF not CFI > Did you forget choice D on the 2nd question? > anyhow Ill go with A again…
Another thing zero coupon bond will not have a cash outflow during the term since it makes no coupon payments.
Sorry typo CFF I mean…
yes 0 coupon bond will not have cash outflow until the maturity date. CFF inflow will be less with 0 coupon bond, hence CFF will be lower with 0 coupon bond
I chose A for both questions I is correct because discount bond overstates CFO II is incorrect because discount bond understates CFF III is incorrect because the initial liability would be the same (same amount of cash) I is correct because bonds with warrant is a hybrid bond, part of the value goes to equity II is incorrect because higher interest from conventional bond reduces NI III is incorrect because NI is lower, which makes CFO for conventional bond lower
the first one answer is D I: true; CFO higher for 0 coupon, this is because 0 coupon does not have to pay interest during the time. so CFO is higher. II: false; 0 coupon accumulated all the interest payment to the end of period and include this in the principle payment, which is counted as CFF. so CFF will be lower for 0 coupon III: true. (according to the answer) I do not know why… if they company is borrowing the same amount. i thought that means the PV of the bond should be the same, thus, the liability recorded should be the same anyone can clarify on this? thanks
Yea ur right,…
My guess for higher liabilies for Zero Coupon Bond is that since the company is raising the same amount of capital as Conventional bondds, it will have to factor in the interest that will be paid to holders of those Zeros (hidden cost?) on the other hand, conventional bond is pretty straight forward. u record the par value of bond as the liability… Correct me if i m wrong.Thanks.