Which of the following statements about the company's financial operations and financial decisions is FALSE? If your company overdraws its checking account, the Global Community Bank will automatically issue your company a 1-year loan in an amount sufficient to bring your ending cash balance up to zero. The interest rate charged on overdraft loans is always 2% above whatever interest rate your company would otherwise pay on a 1-year loan from the GCB (for example, if your company's B credit rating entitled your company to a 1-year loan carrying a 6.5% interest rate, then the interest rate on a 1-year overdraft loan would be 8.5%). If the company needs to secure additional capital, it can take out loans with 1-year, 5-year. and/or 10-year terms from the Global Community Bank and/or it can issue new shares of common stock. The company's banking arrangement with the Global Community Bank calls for the company to be paid interest on any positive cash balance in the company checking account at the beginning of each year. The agreed-upon interest rate is set at 2.5 percentage points below the prevailing interest rate for short-term loans carrying an A+ credit rating. At the end of Year 5, the company had 20 million shares of common stock outstanding. Using cash on hand to repurchase and retire outstanding shares has the advantage of increasing earnings per share, returns on equity investment, and the company stock price. However, the Board of Directors has reserved the right to limit the number of shares repurchased in any given year and has also ruled thatÂ the company must maintain a minimum of 15 million shares outstanding and a minimum total shareholder equity of $100 million.

Intermediate Accounting: Reporting And Analysis

3rd Edition

ISBN:9781337788281

Author:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Publisher:James M. Wahlen, Jefferson P. Jones, Donald Pagach

Chapter6: Cash And Receivables

Section: Chapter Questions

Problem 12C: Researching GAAP Situation Hamilton Company operates in an industry with numerous competitors. It is...

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Which of the following statements about the company's financial operations and financial decisions is FALSE?

If your company overdraws its checking account, the Global Community Bank will automatically issue your company a 1-year loan in an amount sufficient to bring your ending cash balance up to zero. The interest rate charged on overdraft loans is always 2% above whatever interest rate your company would otherwise pay on a 1-year loan from the GCB (for example, if your company's B credit rating entitled your company to a 1-year loan carrying a 6.5% interest rate, then the interest rate on a 1-year overdraft loan would be 8.5%).

If the company needs to secure additional capital, it can take out loans with 1-year, 5-year. and/or 10-year terms from the Global Community Bank and/or it can issue new shares of common stock.
The company's banking arrangement with the Global Community Bank calls for the company to be paid interest on any positive cash balance in the company checking account at the beginning of each year. The agreed-upon interest rate is set at 2.5 percentage points below the prevailing interest rate for short-term loans carrying an A+ credit rating.
At the end of Year 5, the company had 20 million shares of common stock outstanding.
Using cash on hand to repurchase and retire outstanding shares has the advantage of increasing earnings per share, returns on equity investment, and the company stock price. However, the Board of Directors has reserved the right to limit the number of shares repurchased in any given year and has also ruled thatÂ the company must maintain a minimum of 15 million shares outstanding and a minimum total shareholder equity of $100 million.

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