Indian School of Business

Financial Accounting in Decision Making (FADM)

Digital Headstart Module: 2022-23

Group assignment # 2

Q 1. When market expected rate of return > Coupon rate, the bond will be valued at
A. Premium
B. Par value
C. Discount
D. None of the above.

Q2. Under the effective interest rate method of amortizing bond discount or premium, the
interest expense for the period is the result of multiplying the__________ interest rate at the time
the bond was issued times the bond's carrying value at the beginning of the current period.
A. Coupon
B. Market
C. Risk free
D. LIBOR

Q3. The amortization of the bond discount will result in less interest expense than the amount of
the interest payments.
A. True
B. False

Q4. A bond's maturity value is more likely to be its __________.

A. Issue Price
B. Par value

Use the following information to answer Q5-Q8

$100,000 of 5% annual interest, 5-year bonds were sold when the market rate of interest was 6%.

Q5. The cash received when bonds were sold is

A. 95,787
B. 104,329
C. 100,000
D. 105,000

Q6. Cash paid to the bondholders at the end of first year is

A. 100,000
B. 5,000
C. 5,747
D. 6,000
Q7. Interest expense for the first year is
A. 0
B. 5,000
C. 5,747
D. 6,000

Q8. Net bond payable at the end of first year is

A. 95,000
B. 96,535
C. 100,000
D. 105,000

Use the following information to answer Q9-10

Suppose, $100,000 of 8% annual interest, 10-year bonds were sold at 105,500 when the market
rate of interest was 7%.
Q9. Interest expense for the first year is
A. 8,000
B. 7,000
C. 7,385
D. 8,440

Q10. Using the effective interest method, the bond premium amortization for the first interest
period will be:
A. 880
B. 615
C. 7365
D. 440

Q11. Which type of bond gives the issuing corporation the option of retiring the bond, at a
predetermined price, prior to the maturity date of the bond?
A. Callable bond
B. Convertible bond
C. Serial bond
D. Secured bond

Q12. Which type of bond offers protection to a lender by giving the lender the right to be paid
from the cash proceeds from the sale of specified assets that belong to the borrower and are
identified in the agreement?
A. Mortgage bond
B. Debenture
C. Subordinated debenture
 D. Junk bond

Q13. Lender putting restrictions on sale of fixed assets by the borrower is most likely considered
as which of the following -
A. Covenants trying to protect creditor interests in worst case scenario
B. Lender trying to negotiate voting rights
C. Lender trying to acquire the borrower
D. Lender arm-twisting the borrower

Refer to table below and answer Q14-Q20

Year = 2019 AMAZON WALMART Shoppers stop

Sales 2,80,522 5,23,964 3577.93
EBIT 14,541 20,568 115
Interest 1,600 1,975 45
Net income 11,588 14,881 65
Avg Total Assets 2,25,248 2,36,495 2,476
Avg SE 62,060 81,552 915

Q14. Which company has highest ROE in 2019?

A. Amazon
B. Walmart
C. Shoppers stop
D. None of the above

Q15. Which company has highest net profit margin in 2019?

A. Amazon
B. Walmart
C. Shoppers stop
D. None of the above

Q16. Which company has best asset turnover ratio in 2019?

A. Amazon
B. Walmart
C. Shoppers stop
 D. None of the above

Q17. Which company has least leverage (as defined in the Du Pont analysis) in 2019?

A. Amazon
B. Walmart
C. Shoppers stop
D. None of the above

Q18. If all three companied were to have a leverage (as defined in the Du Pont analysis) of 2.0,
which company will have highest ROE in 2019?

A. Amazon
B. Walmart
C. Shoppers stop
D. None of the above

Q19. What prevents Shopper’s Stop from increasing leverage and improving it’s ROE?

A. It cares more about sales growth and not about ROE

B. Increase in leverage does not increase the ROE
C. Increase in leverage will increase the risk of default as it low profit margin
D. They can rather do a stock split and increase ROE
E. None of the above

Q20. Which company is in best position to pay the interest on debt from the profits it generates
from its operations?

A. Amazon
B. Walmart
C. Shoppers stop
D. None of the above