Question

If using PV/FV tables, do not round the factors. Use all five of the numbers to the right of the decimal point.

Juan Company is seeking to borrow some money on a long-term basis.  This firm is considering pursuing one of two alternatives: (1) issuing twenty bonds with a face amount of $1,000 each or (2) signing a long-term note payable for $17,000.  Assume that both alternatives would provide cash to Merle on December 31, Year 1.

The terms of the two alternatives are presented below:

1. The bonds would have a coupon rate of 8% and a market rate [effective rate] of 10%.  The bonds would pay interest semiannually on June 30 and Dec. 31 and would have a maturity date on Dec. 31, Year 12.
2. The note payable would have an interest rate of 8% and would be paid off over 5 years with equal quarterly installments starting three months after Dec. 31, Year 1.  These payments would fully amortize the note’s principal and interest.  Amortize means ‘pay off.’ This is a long-term Note Payable as it extends for longer than one year.

If using the PV/FV tables, do not round the factors from the way they are shown in the tables. Present your answers in whole dollar amounts only, without '$' signs and without commas.

#1. How much cash would issuing the bonds on Dec. 31, Year 1, provide to Merle on that date? This is the issue price. _______

#2. How much Interest Expense would the firm recognize in Year 2 if it issued the Bonds Payable? Year 2 ends on Dec. 31, Year 2. _________

#3. How much Interest Expense would the firm recognize in Year 2 if it borrows using the Note Payable? Year 2 ends on Dec. 31, Year 2. ________

#4. How much cash will Merle have to pay out in Year 3 if issuing the Bonds Payable? _______

#5. How much cash will Merle have to pay out in Year 3 if issuing the long-term Note Payable? _______

#6. What would the carrying value of the Note Payable be on Dec. 31, Year 5, after making the sixteenth loan payment on that date? ______

#7. What would the carrying value of the Bonds Payable be on Dec. 31, Year 5, after making the interest payment on that date? ______

Answer 1