Comparative Analysis — BTN 10-2
1. Apple’s current year debt-to-equity ratio = $83,451 / $123,549 = 0.68
Apple’s prior year debt-to-equity ratio = $57,854 / $118,210 = 0.49
2. For both years, Apple’s debt-to-equity ratio is above that of the industry
average of 0.44. This implies that its debt levels are more risky than that
Ethics Challenge — BTN 10-3
1. The ethics of the Traverse County officials are questionable. The
financial impact of the leasing arrangement is the same as bond
financing in that the county has a debt obligation requiring the
repayment of principal and interest over time. Taxes may need to be
talk angered the municipal bond industry and the investors.
2. Because the lease requires payments of a non-binding nature, investors
Communicating in Practice — BTN 10-4
MEMORANDUM
TO:
FROM:
SUBJECT:
The body of the memorandum should make the following points:
The associate is confused about the concept of a bond premium. Bonds
that sell at a premium provide the issuing company more cash than they
The bottom line is that the market prices the bonds according to their
perceived risks and returns. What your associate needs to focus on is the
Taking It to the Net — BTN 10-5
1. Home Depot’s long-term liabilities as of February 2, 2014, follow:
Long-term debt, excluding current installments..…........ $14,691 million
2 a. These Home Depot notes offer a 5.875% interest rate. If the interest
rate for similar notes from companies with similar risk was 5.875%,
b. Cash interest that must be paid:
Teamwork in Action — BTN 10-6
Parts 1 and 2
Effective Interest Amortization of Bond Premium
Semi-
annual
Period-end
(A)
Cash
Interest
Paid
(B)
Bond
Interest
Expense
(C)
Premium
Amortization
(D)
Unamortized
Premium
(E)
Carrying
Value
1/01/2015 $ 4,100 $ 104,100
6/30/2015 $ 4,500 $ 4,164 $ 336 3,764 103,764
6/30/2017 4,500 4,107 393 2,281 102,281
Since teams generally have 4 or 5 members, the team solution will likely end about
here. The remainder of the table is shown for help in answering part 3.
12/31/2017 4,500 4,091 409 1,872 101,872
6/30/2018 4,500 4,075 425 1,447 101,447
*Discrepancy due to rounding.
The following computations should be articulated by team members as
each line is explained and prepared:
Column (A) Cash Interest Paid = Bonds’ par value ($100,000) x Semiannual
contract rate (4.5%).
the current period’s premium amortization, or [(D) – (C)].
Column (E) Bonds’ Carrying Value = Bonds’ par value plus unamortized
premium, or [$100,000 + (D)] or Previous book value – Period’s amortization.
Teamwork in Action (Concluded)
Part 3
Without completing the table, team members should be able to project the
final number in the first column and for each of the columns (A), (D), and
(E). Specifically:
(Col. 1) Last interest period date is 12/31/2019 because this is a five-year
bond, issued 1/1/2015, with semiannual interest payments made
on 6/30 and 12/31 of each year.
recorded).
Part 4
Total Bond interest expense = Interest Paid – Premium
= $45,000 – $4,100 = $40,900
Part 5 List likely includes:
Similarities Differences
a. Table column headings
for the period and for
columns (A), (B), and (E).
a. Column (C) will be Discount Amortization and
Column (D) will be Unamortized Discount.
will follow the same format.
d. Ending unamortized
premium and discount (D)
will both be zero.
d. Carrying value (E) will decrease as we amortize a
premium.
Entrepreneurial Decision — BTN 10-7
Part 1
The table below reveals how the five alternative interest-bearing notes
would affect this company’s interest expense, net income, equity, and
return on equity (net income/equity):
Alternative Notes for Expansion
Current 10% Note 15% Note 16% Note 17% Note 20% Note
Income before
interest…………..$ 40,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000 $ 56,000
Interest expense…. 10,000 20,000 25,000 26,000 27,000 30,000
Equity…….…….…….$250,000 $250,000 $250,000 $250,000 $250,000 $250,000
Return on equity... 12% 14.4% 12.4% 12% 11.6% 10.4%
Part 2
The analysis in Part 1 illustrates the general rule (called “financial
leverage” or “trading on the equity”): When a company earns a higher
less than 16%.
The table in Part 1 reveals this result, where those notes with interest
expense below 16% are profitable (that is, yield a return greater than the
Hitting the Road — BTN 10-8
Students’ answers will depend on the municipality and time period chosen
reinforces the relevance of their accounting studies.
Global Decision — BTN 10-9
1. Samsung’s current year debt-to-equity ratio (in KRW millions):
64,059,008 / 150,016,010 = ₩ ₩ 0.43
2. Samsung’s debt-to-equity ratio decreased slightly from the prior year to
the current year. For the current year, Samsung’s debt-to-equity ratio is
lower than Apple and in the prior year it was the same as Apple. This