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Question
Service cost and interest cost cause reported pension expense to increase for defined benefit plans.
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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A factor that can reduce managers' short-term focus is the fact that incentive compensation plans are administered by a compensation committee that can intervene when circumstances warrant modification of the scheduled incentive award.
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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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Commercial lending agreements may contain provisions that are designed to protect the lender from a deterioration of the borrower's creditworthiness.
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Risky firms have a higher risk-adjusted cost of capital. Which one of the following factors would contribute to that firm also having a high price/earnings ratio?
A. High earnings per share.
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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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