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Chapter 5: 6DQ (page 493)
Discuss the benefits accruing to a company that is traded in the public securities markets.
A publicly-traded company can develop new products and acquire assets by gathering funds from security markets.
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What are the disadvantages to being public?
Why is secondary trading in the security markets important?
What cost of capital is generally used in evaluating a bond refunding decision? Why?
The Ellis Corporation has heavy lease commitments. Prior to SFAS No. 13, it merely footnoted lease obligations in the balance sheet, which appeared as follows:
In \( millions | In \) millions | ||
Current assets | \(70 | Current liabilities | \)30 |
Fixed assets | \(70 | Long-term liabilities | \)30 |
Total liabilities | \(60 | ||
Stockholder鈥檚 equity | \)80 | ||
Total assets | \(140 | Total stockholder鈥檚 equity and liabilities | \)140 |
The footnotes stated that the company had $14 million in annual capital lease obligations for the next 20 years.
e. In an efficient capital market environment, should the consequences of SFAS No. 13, as viewed in the answers to parts c and d, change stock prices and credit ratings?
The Hardaway Corporation plans to lease a $740,000 asset to the O鈥橬eil Corporation. The lease will be for 11 years.
a. If the Hardaway Corporation desires a 13 percent return on its investment, how much should the lease payments be?
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