Oracle Corporation: Share-Based Compensation Effects/Statement of Shareholders’ Equity 485 variable-interest-rate obligation; the variable rate in…

I need tutor help in solving the first part on derivative (swaps and variable interest rate)

Oracle Corporation: Share-Based Compensation Effects/Statement of Shareholders’ Equity485variable-interest-rate obligation; the variable rate in the swap is intended to track the variablevate used by the supplier to revalue the note while it is outstanding. The swap causes FD’s inter-est payments to vary as the variable interestnterest rate changes, but it locks the value of the notepayable at $100,000, and thus qualifies the swap as a hedge of value changes in an existingiability. Under the terms of the swap, the counterparty (the bank) resets the interest rate eachDecember 31. Assume that the interest rate is reset to 3% at December 31, 2017, and to 59% atDecember 31, 2018. Interest rates remain steady from that date forward.REQUIREDUse the financial template used throughout the chapter to record the financial statement effectsand journal entries of these transactions and events through December 31, 2019.Part B.REQUIREDRepeat Part A assuming that the 4% interest rate is variable and that the supplier resets the interestrate each December 31 to establish the interest charge for the next calendar year. In this case, FDwants to protect its future cash flows against increases in the variable interest rate to more than theinitial 4% rate, so it contracts with the bank to swap its variable-interest-rate obligation for a fixed-interest-rate obligation. The swap fixes the firm’s annual interest expense and cash expenditure to4% of the $500,000 note. FD designates the swap contract as a cash flow hedge.INTEGRATIVE CASE 7.1WalmartIt is common practice for retail outlets to lease their store locations and distribution centers.Walmart is no exception. Note 11 to Walmart’s consolidated financial statements for the fiscalLO 7-4, LO 7-6year ending January 31, 2016 (found online at the text website or available for download in theinvestor relations section of Walmart’s website), provides information on future operating leasecommitments.REQUIREDa. Effectively capitalize the operating lease obligations. You must first choose and justify aninterest rate. Assume that all cash flows occur at the end of each year.b. Recompute the long-term debt to long-term capital ratio (see Chapter 5) using your capi-talized operating leases. Comment on the results.CASE 7.2Oracle Corporation: Share-Based CompensationEffects/Statement of Shareholders’ EquityA sales-based ranking of software companies provided by Yahoo! Finance on November 5,LO 7-1, LO 7-22008, places Oracle Corporation third behind sales leaders Microsoft Corporation andIBM Software. Typical of high-tech companies in the software industry, Oracle Corporationuses share-based compensation plans extensively to motivate its employees. In Note 11 of itsMay 31, 2008, annual report, Oracle states that it settles employee stock option exercisesprimarily with newly issued common shares.

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