Question 01 A company issues 5% convertible bonds at their nominal value of $ 6 million.
The bonds are convertible at any time up to maturity into 500 ordinary shares. Alternatively the
bonds will be redeemed at par after 3 years.
Similar nonconvertible bonds would carry an interest rate of 7%.
The present value of $1 payable at the end of year, based on rates of 5% and 7% are as follows:
End of year
5%
7%
1
0.935
0.952
0.907
2.
0.873
3
0.864
0.816
Requirement:
1. What amounts will be shown as a financial liability and as equity when the convertible bonds ar
issued?
2. What amounts will be shown in the income statement and Statement of Financial Position for
years 1-3?

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Shrieves casting company is considering adding a new line to its product mix, and the capital budgeting analysis is being conducted by sidney johnson, a recently graduated mba. the production line would be set up in unused space in the main plant. the machinery’s invoice price would be approximately $200,000, another $10,000 in shipping charges would be required, and it would cost an additional $30,000 to install the equipment. the machinery has an economic life of 4 years, and shrieves has obtained a special tax ruling that places the equipment in the macrs 3-year class. the machinery is expected to have a salvage value of $25,000 after 4 years of use. the new line would generate incremental sales of 1,250 units per year for 4 years at an incremental cost of $100 per unit in the first year, excluding depreciation. each unit can be sold for $200 in the first year. the sales price and cost are both expected to increase by 3% per year due to inflation. further, to handle the new line, the firm’s net working capital would have to increase by an amount equal to 12% of sales revenues. the firm’s tax rate is 40%, and its overall weighted average cost of capital, which is the risk-adjusted cost of capital for an average project (r), is 10%. define “incremental cash flow.” (1) should you subtract interest expense or dividends when calculating project cash flow?