Questions for Class Discussion -- Complex Financial Insturments

Questions for Class Discussion -- Complex Financial Insturments

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COMMERCE 450 FALL 2011 QUESTIONS FOR CLASS DISCUSSION COMPLEX FINANCIAL INSTRUMENTS QUESTION 1 On October 1, 2008, XYZ Co. Ltd. issued a $2 million, 10 year (matures 9/30/2008) convertible, 8% (September 30, March 31) bond. Each $1,000 bond can be converted into 80 shares of no par-value common stock. In addition, each bond included 20 detachable common stock (no par value) warrants with an exercise price of $20.00 each. Immediately after issuance the warrants traded at $4 each. Gross proceeds on issuance were $2,600,000. Underwriting fees were $48,105 and were deducted from these gross proceeds. The company uses the effective interest rate method to amortize premiums and discounts. XYZ Co. Ltd.'s year end is December 31. (Assume that the underwriting fees are deducted from the carrying value of the debt component of the issue.) Assume that without the warrants and conversion features the bond would be expected to yield 6% annually. Use the incremental method to value the conversion feature. On February 22, 2011 half (i.e., 20,000) of the warrants were exercised. The shares of XYZ Co. Ltd. were trading at $44.00 each on this day. Required: a) Prepare all the journal entries for fiscal year 2008. b)
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This note was uploaded on 12/10/2011 for the course COMM 450 taught by Professor Jackes during the Spring '10 term at UBC.

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Questions for Class Discussion -- Complex Financial Insturments

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