Chapter 10: Serial Problem

For the given tasks, I will break down the solutions step by step for each problem. Here’s how to approach each: Serial Problem SP 10: Business Solutions 1. Calculate the Maximum Loan Using Debt-to-Equity Ratio o The debt-to-equity ratio is calculated as: Debt-to-Equity Ratio=Total Liabilities o o The bank requires the ratio to be no more than 0.8. Let's denote:  Total liabilities (current debt) as LLL  Total equity as EEE  Additional borrowing as BBB The equation for the maximum borrowing amount is: L+BE≤0.8 Rearrange to solve for BBB: B≤0.8×E−L Plug in the values to find the maximum amount allowed to borrow. 2. Calculate the Percentage of Assets Financed by Debt and Equity o Total assets equal total liabilities plus total equity: o Total Assets=Liabilities+Equity o After borrowing the maximum amount, calculate:  Percentage financed by debt: Percentage of Debt=Liabilities+BTotal Assets×100 100Percentage of Debt=Total AssetsLiabilities+B×100  Percentage financed by equity: Percentage of Equity=EquityTotal Assets×100 Factors to Consider Before Borrowing o o o Debt servicing capacity: Evaluate the ability to make interest payments. Impact on cash flow: Consider cash flows needed for debt repayments. Effect on future financing: Additional debt could limit future borrowing. o o Risk of higher interest rates: If market rates increase, refinancing could be costlier. Business growth potential: Evaluate whether the expansion will significantly increase profits. Extended Analysis AA 10-1, AA 10-2, and AA 10-3: Company Debt Analysis 1. Debt Analysis for Apple o Identify Apple’s long-term debt for the specified years and compute the percentage change. o Analyze whether the trend indicates an increasing or decreasing interest expense. o The trend’s implication on financing strategy should be considered for future interest rate expectations. 2. Comparative Analysis for Apple and Google o Calculate the debt-to-equity ratios for both companies for the current and previous years. o Compare their ratios to the industry average to determine the risk levels. o Evaluate which company has a safer or riskier financial structure. 3. Debt Comparison Among Samsung, Apple, and Google o Compute Samsung's debt-to-equity ratio and assess the changes from the prior year. o Compare the ratios to Apple and Google to see which company is more leveraged. Discussion and Beyond the Numbers Questions 1. Difference Between Notes Payable and Bonds Payable o Notes Payable: Typically involve smaller amounts, are issued to banks or private lenders, and are not traded in markets. o Bonds Payable: Large amounts, issued to the public, traded in markets, and come with specific terms such as coupon rates and maturity dates. 2. Difference Between Bonds and Stocks o Bonds: Fixed income securities representing a loan from investors to the company. o Stocks: Equity instruments representing ownership in the company. 3. Benefits of Issuing Bonds Over Equity o Bonds do not dilute ownership. o Interest payments are tax-deductible, reducing the net cost of borrowing. BTN 10-1 to BTN 10-4 Analysis 1. Ethics Challenge BTN 10-1 Discuss whether bypassing voter approval for financing is ethical. o Compare the risk profiles of the tax-exempt securities with traditional municipal bonds. 2. Memorandum on Premium Bonds BTN 10-2 o Explain that bonds selling at a premium have a coupon rate higher than the market rate, so the yield to maturity may be lower than the coupon rate. 3. Teamwork in Action BTN 10-3 o Work through the effective interest amortization for premium bonds and explain the process. 4. Entrepreneurial Decision BTN 10-4 o Use the return on equity formula to analyze the effects of different interest rates on the expansion project. o General rule: If the return on the investment exceeds the cost of borrowing, it is beneficial. o These approaches cover the step-by-step calculations and analysis needed for each task. Let me know if you need detailed computations for a specific part!