When a company issues debt securities at a premium or discount, what are the effects on the companies CFO respectively? a.) Understate, Understate b.) Overstate, Understate c.) Understate, Overstate d.) Overstate, Overstate
c
I suppose the order of options is Premium…Discount A bond issued at premium overstates CFF and understates CFO by the same amount A bond issued at discount overstates CFO and understates CFF by the same amount
Correct answer is C
Bond at premium= a portion of the CFF outflow has been shifted to an CFO Zero Coupon= all the CFO outflow has been shifted to an CFF Bond at discount= a portion of the CFO outflow has been shifted to an CFF Therefore: B
Premium Bond CFO: Understate CFF:Overstate Discount Bond CFO: Overstate CFF: Understate Zero-coupon CFO: Severely Overstate CFF: Understate
> > Zero-coupon > > CFO: Severely Overstate CFF: Understate nice, can you give me some more color here?
issuing discount bonds overstate CFO because instead of the interest expense (which is higher than the coupon) being charged to CFO the coupon interest is. that systematically understates CFO because your using the smaller number as the charge and not the true Interest expense. for zero coupon bonds nothing is charge against CFO due to the fact that the interest is implicit, therefore is severely overstate CFO
sorry meant to write systematically overstates CFO
getterdone Wrote: ------------------------------------------------------- > issuing discount bonds overstate CFO because > instead of the interest expense (which is higher > than the coupon) being charged to CFO the coupon > interest is. > > that systematically understates CFO because your > using the smaller number as the charge and not the > true Interest expense. > > for zero coupon bonds nothing is charge against > CFO due to the fact that the interest is implicit, > therefore is severely overstate CFO i like you, dude.
thanks bro, likewise
getterdone Wrote: ------------------------------------------------------- > issuing discount bonds overstate CFO because > instead of the interest expense (which is higher > than the coupon) being charged to CFO the coupon > interest is. > > that systematically OVERstates CFO because your > using the smaller number as the charge and not the > true Interest expense. > so it is always the COUPON interest that hits the CFO, right?
yep