Debtholders receive note contracts, one for each note, that describe the payments promised by the issuer of
Question:
Consider Roswell Manufacturing's debt indenture, which requires Roswell's ratio of total liabilities to total stockholders' equity never to exceed 2:1. If Roswell violates this requirement, the debt indenture specifies very costly penalties, and if the violation continues, the entire debt issue must be retired at a disadvantageous price and refinanced. In recent years, Roswell's ratio has averaged about 1.5:1 ($15 million in total liabilities and $10 million in total stockholders' equity). However, Roswell has an opportunity to purchase one of its major competitors, Ashland Products. The acquisition will require $4.5 million in additional capital, but it will double Roswell's net income. Roswell does not believe that a stock issue is feasible in the current environment.
The Financial Accounting Standards Board recently issued a new standard concerning accounting for post employment benefits, which is strongly supported by the Securities and Exchange Commission. Implementation of the new standard will add about $2 million to Roswell's long-term liabilities. Roswell's CEO, Martha Cooper, has written a strong letter of objection to the FASB. The FASB received similar letters from over 300 companies.
Required:
1. Write a paragraph presenting an analysis of the impact of the new standard on Roswell Manufacturing.
2. If you were a member of the FASB and met Martha Cooper at a professional meeting, how would you respond to her objection?
Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Related Book For
Cornerstones of Financial and Managerial Accounting
ISBN: 978-0324787351
1st Edition
Authors: Rich Jones, Mowen, Hansen, Heitger
Question Posted: