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Earnings management may be used to avoid a technical default of a covenant under a loan agreement. Loan covenants are written into loan agreements in order to protect a lender form various actions that a borrower might undertake. These covenants often require attainment of certain target financial ratios – calculated using reported GAAP numbers. Failing to achieve these minimum target ratios, and hence falling into technical default, can be very costly to a firm. Earnings management to prevent a technical default will likely save a corporation and its shareholders form experiencing a large loss in market value , without necessarily providing any direct personal benefit to the company’s managers. Is earnings management to avoid a loan covenant violation an ethical breach by management?
If a breach looks inevitable, what actions, other than earnings management, could management take?
Identify and discuss two reinburstment methods that the organization may utilize, and explain what risks those methods may or may not bring to the organization.
Assume that Alex is 74 years old at the end of year tired, and that his marginal tax rate us 25 percent his account balance in his traditional 401k was 1,250.000 at the end of last year. what is the minimum distribution Alex must receive from his 401..
The present worth of this series at the end of the 5 periods, where interest is 2% per t, is nearest what value?
The Cost of Debt and Flotation Costs: Suppose a company will issue new 20-year debt with a par value of $1,000 and a coupon rate of 9%, paid annually. The tax rate is 40%. If the flotation cost is 2% of the issue proceeds, then what is the after-tax ..
What is the beta of Stock A given the following returns of the market and Stock A in two states of the economy?
Use Appendix D for an approximate answer but calculate your final answer using the financial calculator method. What is the internal rate of return?
What would be the company before tax component cost of debt?
The growth rate in dividends is expected to be a constant 4 percent per year indefinitely. What is the current share price?
Barry, Hank, and Babe form a company named Long Ball Investments, hoping to find that elusive home run stock. A new clothing company by the name of Major League Apparel has caught their eye. Major League Apparel has two classes of stock authorized: C..
Boversia might reduce its exchange rate against the dollar by 3 percent per year. - Why might a country adopt a crawling peg?
Below are the data for two stocks, both of which have a discount rate of 10 percent: Stock A Stock B Return on equity 11% 12% Earnings per share $2.20 $.90 Dividends per share $ .95 $.50 a. What are the dividend payout ratios for each firm? b. What a..
Bilbo Baggins wants to save money to meet three objectives. First, he would like to be able to retire 30 years from now with a retirement income of $32,000 per month for 20 years, with the first payment received 30 years and 1 month from now. Second,..
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