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Question
If a company purchases treasury stock its earnings per share will increase.
Answer
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Perez Company sold equipment to Gomez, receiving in exchange a note that called for three equal annual principal payments of $100,000 plus annual interest payments of $4,000. Because the market rate of interest for companies with Gomez' credit standing was 6% at the time of the sale, Perez correctly recorded the note at its present value of $277,993. After receiving the first payment, Perez learns that the market rate of interest on loans of this type has fallen to 5%. Assume that there is an active market for these types of notes. The present value of $1 to be received n periods in the future = 1 (1 + r)n where r is the rate of interest per period.
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Managerial strategies and decisions clearly affect stock prices both in the short and long run.
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Borrowers do not appear willing to pay substantially higher interest rates to retain accounting flexibility that may help them avoid covenant violations.
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Because covenant compliance can be jeopardized by mandated changes in accounting principles, many loan agreements have financial covenants that rely on the accounting rules in place when the loan is first granted.
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A. High earnings per share.
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C. long-term incentives.
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C. negative restrictions.
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B. borrowers.
C. both lenders and borrowers.
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B. the consignee.
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