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InfoMemo Audit 2.0 Citlali Perez, Saida Schmidt, Jacob Brownfield, Justin Ricaurte
Scenario ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Outline ,[object Object],[object Object],[object Object],[object Object],[object Object]
Explanation of Term Sheet
[object Object],Convertible Bond Stock Bond
Accounting Guidance ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],The Balance Sheet Journal Entry for the issuance of the bond
[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Journal Entries to record payment on interest
Consequences of Term Sheet Scenario 1
Assumptions ,[object Object],[object Object],[object Object]
Conversion After 5 Years ,[object Object],1/1/X6 Dr. Bonds Payable $15M Cr. Common Stock $ 1.5M Cr. APIC $13.5M
Effect on EPS ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]
Sample Footnote Disclosure 0.62 $   0.48 $   0.64 $ Diluted net income per share                    0.7 $   0.55 $   0.72 $ Basic net income per share                    69,412     76,516     85,919   Shares used in computation of diluted net income per share                    2,548     6,163     6,163   Add: Dilutive effect of convertible debt  5,639     6,254     5,017   Add: Dilutive effect of employee stock options                    61,225     64,099     74,739   Shares used in computation of basic net income per share                    —     —     (108   Less: Weighted average common shares subject to repurchase  61,225     64,099     74,847   Gross weighted average common shares outstanding                  Shares (denominator for basic and diluted):  43,321 $   36,602 $   55,369 $ Adjusted net income (numerator for diluted)                    438     1,421     1,415   Add: Interest expense on convertible notes, net of tax  42,883 $   35,181 $   53,954 $ Net income (numerator for basic)                    2004   2005   2006   Year Ended December 31,  
  Consequences of Term Sheet:  Scenario 2
Beneficial Conversion Feature Effective Conversion Price  $10 < Fair Value of the Stock (@ commitment date)  $12 Convertible debt instrument includes a beneficial conversion feature for which a value must be assigned.
Valuation of Beneficial Conversion Feature ,[object Object],[object Object],[object Object],[object Object],[object Object]
Journal Entries for Beneficial Conversion ,[object Object],[object Object],[object Object],[object Object],[object Object]
Interest Expense and Bond Discount Amortization ,[object Object],[object Object],*Note: Should use the Effective Interest Rate Method to calculate amortization per EITF 00-27, pars. 19-20
Journal Entries for Beneficial Conversion ,[object Object],[object Object],[object Object],[object Object],[object Object]
[object Object],[object Object],[object Object],[object Object],[object Object],Accounting for Unamortized Bond Discount upon Conversion
Journal Entries for Beneficial Conversion (After IPO) ,[object Object],[object Object],[object Object],[object Object],[object Object]
Analysis of Financing Options InfoMemo
Alternative Financing Instruments ,[object Object],[object Object],[object Object]
Investment Assumptions ,[object Object],[object Object]
Key Good Bad
[object Object],[object Object],[object Object],[object Object],What InfoMemo Cares About
What InfoMemo Cares About Cost Lost Control Aligned Interests Common Bridge Convertible Preferred Loan Good Bad Dilution
[object Object],[object Object],[object Object],What the Investor Cares About
What the Investor Cares About ROI Risk Taxes Common Bridge Convertible Preferred Loan Good Bad
The Convertible Bond Dilution Cost Lost Control Aligned Interests ROI Risk Taxes
Recommendation ,[object Object],[object Object]
Questions? InfoMemo

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ALPFA National Convention KPMG Case Competition

  • 1. InfoMemo Audit 2.0 Citlali Perez, Saida Schmidt, Jacob Brownfield, Justin Ricaurte
  • 2.
  • 3.
  • 4.
  • 6.
  • 7.
  • 8.
  • 9.
  • 10. Consequences of Term Sheet Scenario 1
  • 11.
  • 12.
  • 13.
  • 14. Sample Footnote Disclosure 0.62 $   0.48 $   0.64 $ Diluted net income per share                   0.7 $   0.55 $   0.72 $ Basic net income per share                   69,412     76,516     85,919   Shares used in computation of diluted net income per share                   2,548     6,163     6,163   Add: Dilutive effect of convertible debt 5,639     6,254     5,017   Add: Dilutive effect of employee stock options                   61,225     64,099     74,739   Shares used in computation of basic net income per share                   —     —     (108   Less: Weighted average common shares subject to repurchase 61,225     64,099     74,847   Gross weighted average common shares outstanding                 Shares (denominator for basic and diluted): 43,321 $   36,602 $   55,369 $ Adjusted net income (numerator for diluted)                   438     1,421     1,415   Add: Interest expense on convertible notes, net of tax 42,883 $   35,181 $   53,954 $ Net income (numerator for basic)                   2004   2005   2006   Year Ended December 31,  
  • 15. Consequences of Term Sheet: Scenario 2
  • 16. Beneficial Conversion Feature Effective Conversion Price $10 < Fair Value of the Stock (@ commitment date) $12 Convertible debt instrument includes a beneficial conversion feature for which a value must be assigned.
  • 17.
  • 18.
  • 19.
  • 20.
  • 21.
  • 22.
  • 23. Analysis of Financing Options InfoMemo
  • 24.
  • 25.
  • 27.
  • 28. What InfoMemo Cares About Cost Lost Control Aligned Interests Common Bridge Convertible Preferred Loan Good Bad Dilution
  • 29.
  • 30. What the Investor Cares About ROI Risk Taxes Common Bridge Convertible Preferred Loan Good Bad
  • 31. The Convertible Bond Dilution Cost Lost Control Aligned Interests ROI Risk Taxes
  • 32.