Interpreting Disclosure on Convertible Debentures On March 2, 2017, Snapchat undertook its initial public offering (IPO). Following is Snapchat's balance sheet for its first two fiscal years as a public company, Consolidated Balance Sheets December 31 (in thousands, except par value) 2017 2018 Assets Current assets Cash and cash equivalents. 334063 $ 387 149 Marketable securities .. 1.708.976 891,914 Accounts receivable, net of allowance 279.473 354,965 Prepaid expenses and other current assets 44.282 41,900 Total current assots. 2,386,794 1,675,928 Property and equipment, net 166,762 212,560 Intangible assets, net 166.473 126,054 Goodwill.. 639.882 632.370 Other assets. 81.655 67,194 Total assets. $3,421,566 $2,714,106 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 71.194 $ 30,876 Accrued expenses and other current liabilities 275062 261,815 Total current abilities 348,256 292.691 Other liabilities. 82.983 110.416 Total abilities 429.239 403, 107 Commitments and contingencies Stockholders' equity Class A nonvoting common stock, SO.00001 par value 3,000,000 shares authorized. 883,022 shares issued and outstanding at December 31, 2017 and 3,000,000 shares authorized 999,304 shares issued and outstanding at December 31, 2018 9 10 Class B voting common stock. S0.0000 par value. 700.000 shares authorized, 122,564 shares issued and outstanding at December 31, 2017 and 700.000 shares authorized, 93,845 shares issued and outstanding at December 31, 2018.... 1 Class C voting common stock. $0.00001 par value. 260,888 shares authorized 216,616 shares issued and outstanding at December 31, 2017 and 260.888 shares authorized, 224,611 shares issued and outstanding at December 31, 2018 Additional paid.in capital.. 7,634,825 8,220,417 Accumulated other comprehensive income 14,157 3.147 Accumulated deficit. (4.656.667) (5,912.578) Total stockholders' equity 2,992 327 2,310,999 Total abilities and stockholders' equity $3.421,566 $2.714,106 Snapchat reported the following in a Form 8-K dated August 9. 2019. Purchase Agreement on August 6, 2019, we entered into a purchase agreement with Goldman Sachs, Morgan Stanley, and J.P. Morgan relating to the sale by us of an aggregate of $1.265 billion principal amount of our 0.75% Convertible Senior Noles due 2026 in a private offering. The Notes are convertible into cash, shares of our Class A common stock, or a combination thereof, at our election, at an initial conversion rate of 43.8481 shares of Class A common stock per $1,000 principal amount of continued from previous page the Notes, which is equivalent to an initial conversion price of approximately $22.81 per share of Class A common stock. Holders of the Notes may convert all or a portion of their Notes at their option prior to May 1, 2026, in multiples of $1,000 principal amount, only under the following circumstances: during any calendar quarter commencing after December 31, 2019, if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ... is greater than or equal to 130% of the applicable conversion price of the Notes on each such trading day; Required: a. Why did Snapchat wait two years to issue debt? Why did the company not do so during the time of the IPO? b. What will be the balance sheet effect of the sale of the convertible senior notes? How will this affect the company's leverage? c. Confirm the initial conversion price of $22.81 per share. At what price did SNAP stock close on Au- gust 9, 2019 (use an online investment site to determine the closing price that day)? Compare the two prices and explain why the three investment banks might enter into the purchase agreement described above. d. After December 31, 2019, what minimum stock price is required to permit note holders to convert to Class A common stock? e. What will Snapchat record as interest expense on the convertible senior notes in fiscal 2019? f. How will the convertible senior notes impact the computation of basic and diluted earnings per share (EPS)? 8. Assume that on January 2020, SNAP has traded at around $30 for a month and that bondholders convert $400 million notes. Explain how the conversion will affect debt and equity. Which accounts and by how much? Interpreting Disclosure on Convertible Debentures On March 2, 2017, Snapchat undertook its initial public offering (IPO). Following is Snapchat's balance sheet for its first two fiscal years as a public company, Consolidated Balance Sheets December 31 (in thousands, except par value) 2017 2018 Assets Current assets Cash and cash equivalents. 334063 $ 387 149 Marketable securities .. 1.708.976 891,914 Accounts receivable, net of allowance 279.473 354,965 Prepaid expenses and other current assets 44.282 41,900 Total current assots. 2,386,794 1,675,928 Property and equipment, net 166,762 212,560 Intangible assets, net 166.473 126,054 Goodwill.. 639.882 632.370 Other assets. 81.655 67,194 Total assets. $3,421,566 $2,714,106 Liabilities and Stockholders' Equity Current liabilities Accounts payable $ 71.194 $ 30,876 Accrued expenses and other current liabilities 275062 261,815 Total current abilities 348,256 292.691 Other liabilities. 82.983 110.416 Total abilities 429.239 403, 107 Commitments and contingencies Stockholders' equity Class A nonvoting common stock, SO.00001 par value 3,000,000 shares authorized. 883,022 shares issued and outstanding at December 31, 2017 and 3,000,000 shares authorized 999,304 shares issued and outstanding at December 31, 2018 9 10 Class B voting common stock. S0.0000 par value. 700.000 shares authorized, 122,564 shares issued and outstanding at December 31, 2017 and 700.000 shares authorized, 93,845 shares issued and outstanding at December 31, 2018.... 1 Class C voting common stock. $0.00001 par value. 260,888 shares authorized 216,616 shares issued and outstanding at December 31, 2017 and 260.888 shares authorized, 224,611 shares issued and outstanding at December 31, 2018 Additional paid.in capital.. 7,634,825 8,220,417 Accumulated other comprehensive income 14,157 3.147 Accumulated deficit. (4.656.667) (5,912.578) Total stockholders' equity 2,992 327 2,310,999 Total abilities and stockholders' equity $3.421,566 $2.714,106 Snapchat reported the following in a Form 8-K dated August 9. 2019. Purchase Agreement on August 6, 2019, we entered into a purchase agreement with Goldman Sachs, Morgan Stanley, and J.P. Morgan relating to the sale by us of an aggregate of $1.265 billion principal amount of our 0.75% Convertible Senior Noles due 2026 in a private offering. The Notes are convertible into cash, shares of our Class A common stock, or a combination thereof, at our election, at an initial conversion rate of 43.8481 shares of Class A common stock per $1,000 principal amount of continued from previous page the Notes, which is equivalent to an initial conversion price of approximately $22.81 per share of Class A common stock. Holders of the Notes may convert all or a portion of their Notes at their option prior to May 1, 2026, in multiples of $1,000 principal amount, only under the following circumstances: during any calendar quarter commencing after December 31, 2019, if the last reported sale price of Class A common stock for at least 20 trading days (whether or not consecutive) during the period of 30 consecutive trading days ... is greater than or equal to 130% of the applicable conversion price of the Notes on each such trading day; Required: a. Why did Snapchat wait two years to issue debt? Why did the company not do so during the time of the IPO? b. What will be the balance sheet effect of the sale of the convertible senior notes? How will this affect the company's leverage? c. Confirm the initial conversion price of $22.81 per share. At what price did SNAP stock close on Au- gust 9, 2019 (use an online investment site to determine the closing price that day)? Compare the two prices and explain why the three investment banks might enter into the purchase agreement described above. d. After December 31, 2019, what minimum stock price is required to permit note holders to convert to Class A common stock? e. What will Snapchat record as interest expense on the convertible senior notes in fiscal 2019? f. How will the convertible senior notes impact the computation of basic and diluted earnings per share (EPS)? 8. Assume that on January 2020, SNAP has traded at around $30 for a month and that bondholders convert $400 million notes. Explain how the conversion will affect debt and equity. Which accounts and by how much