At the Beginning of the Year,your Company Borrows $20,000 by Signing

question 17

Multiple Choice

At the beginning of the year,your company borrows $20,000 by signing a four-year promissory note that states an annual interest rate of 8% plus principal repayments of $5,000 each year.Interest is paid at the end of the second and fourth quarters,whereas principal payments are due at the end of each year.How does this new promissory note affect the current and non-current liability amounts reported on the classified balance sheet prepared at the end of the first quarter?

• A)Increase current liabilities by $400;increase non-current liabilities by $20,000.
• B)Increase current liabilities by $1,600;increase non-current liabilities by $20,000.
• C)Increase current liabilities by $5,400;increase non-current liabilities by $20,000.
• D)Increase current liabilities by $5,400;increase non-current liabilities by $15,000.

Understand and calculate the effective annual rate (EAR) and how it impacts savings and loan calculations.

Compare financial products and understand the impact of compounding on interest rates and returns.

Evaluate and compare different cash flow scenarios using present value and future value concepts.

Understand the concepts of perpetuities and their valuation.

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Definitions:

Debt Flotation Costs

Fees and expenses incurred by an issuer of debt when offering new securities to investors.

Capital Structure

The mix of various forms of capital used by a company, including debt and equity, to finance its operations.

Equity

Represents the value that would be returned to a company's shareholders if all of the assets were liquidated and all of the company's debts were paid off.

Refunding Investment Outlay

The process of reallocating or investing capital in new assets or projects with the intention of generating returns or benefits that exceed the initial costs.