Question

In: Accounting

rief Exercise A-14 Dempsey Railroad Co. is about to issue $288,000 of 10-year bonds paying an...

rief Exercise A-14 Dempsey Railroad Co. is about to issue $288,000 of 10-year bonds paying an 9% interest rate, with interest payable semiannually. The discount rate for such securities is 10%. Click here to view the factor table. (For calculation purposes, use 5 decimal places as displayed in the factor table provided.) In this case, how much can Dempsey expect to receive from the sale of these bonds? (Round answer to 0 decimal places, e.g. 2,525.) Dempsey can expect to receive $

Solutions

Expert Solution

  • All working forms part of the answer
  • How Issue Price of the bond is calculated?

Bonds issue price is calculated by ADDING the:

Discounted face value of bonds payable at market rate of interest, and

Discounted Interest payments amount (during the lifetime) at market rate of interest.

Annual Rate

Applicable rate [since semi annual payments]

Market Rate

10.0%

5.0%

Coupon Rate

9.0%

4.5%

Face Value

$             288,000.00

Term (in years)

10

Total no. of interest payments

20

  • Hence, you’ll have to look under:

PV of $1 factor table of 5% for 20th period, AND

PV of Annuity of $1 factor table of 5% for 20th period.

  • Answer:

Amount

PV factor/PV Annuity factor [LOOK the values under your factor table]

Present Values

PV of Face Value of

$             288,000.00

0.37689

$          108,544

PV of Interest payments of

$               12,960.00 [288000 x 9% x 6/12]

12.46222

$          161,510

Issue Price of Bonds

$          270,054 [or $ 270,055 depending on your factor table value]

  • ANSWER = $ 270,055 or $ 270,054

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