Summer 1999 – Exam 3
(30 points)
A. (13 points)
Prior to the day of the exam you were given the lease footnote from a US corporation.
(a)Given the information in the firm’s lease footnotes, what adjustment would you make to the firm’s balance sheet for the operating leases. Show calculations. (8 points)
(b)Name three ratios that your calculations in part (a) will effect? (3 points)
(c)In doing part a) you needed to arrive at an estimate of a (discount) interest rate. Suppose you were told that for the firm in question the balance sheet showed the following amount
Current portion of capital lease obligation……………. $3,298
Use the above amount to derive an estimate of an appropriate interest rate to use.(2 points) Note: You need not redo (a); just compute an interest rate
B. (8 points)
DF infosystems has three issues of convertible subordinated debentures outstanding at December 31, 1997.
1)7%, due 2003, convertible at $50 a share
2)6.75% due 2002, convertible at $45 a share
3)6.5% due 2005,convertible at $55 a share
The market price of DF’s common shares was $48 on December 31, 1997. Its annual report dated 31st December, 1997 had the following balance sheet data:-
Current portion of long term debt$ 20
7% convertible debt$ 300
6.75% convertible debt$ 300
6.5% convertible debt$ 250
Other long term debt$ 500
Total debt$ 1370
Stock holders equity$ 500
Total capital$ 1870
Required:
(a): Compute the debt to equity ratio of DF Infosystems assuming
i)all three convertible debt issues are treated as debt
ii)all three convertible debt issues are treated as equity
(b). State whether DF’s convertible bonds should be treated as debt or equity at December 31, 1997.
(c). On December 31st, 1998 the stock price of DF Infoystems was $56 per share. Discuss whether
the convertible bonds should be classified as debt or equity
(d). based on your answer to part (c) above, recalculate DF’s Debt to equity ratio
C. (9 points) Below is the pension and postretirement benefits footnote for Bausch & Lomb. Other information (not provided) indicates that whole additional (minimum) liability was charged to intangible assets.
(a)What adjustments would you make to Bausch & Lomb’s balance sheet to adjust for the firm’s pension (retirement) plans
- Assuming a going concern
- Assuming liquidation analysis
(b) What adjustments would you make to Bausch & Lomb’s balance sheet to adjust for the firm’s postretirement plans. [Note that Bausch & Lomb is one of the few company’s that has plan assets dedicated for postretirement benefits]