Question

1) On January 2, 2020, McCormick Corporation wishes to issue $5,000,000 (par value) of its 8%, 10- year bonds. The bonds pay interest semi-annually on January 1 and July 1. The current yield rate on such bonds is 10%. Use the approach, compute the amount that Wine will realize from the sale (issuance) of the bonds. You must show your computations to receive full credit.

2. Charlie Corp. is purchasing new equipment with a cash cost of $360,000 for an assembly line. The manufacturer has offered to accept $78,900 payment at the end of each of the next six years. How much interest will Charlie Corp. pay over the term of the loan?

3. Assume Berk Company deposits $100,000 with First National Bank in an account earning interest at 6% per annum, compounded semi-annually. How much will ABC have in the account after five years if interest is reinvested?

4.Hilton Corporation makes an investment today (January 1, 2017). They will receive $80,000 every December 31st for the next six years (2019 - 2024). If Hiller wants to earn 10% on the investment, what is the most they should invest on January 1, 2019?

5.Berzina Company will receive $500,000 in 7 years. If the appropriate interest rate is 8%, determine the amount that must be deposited today.

Answer 1

1) Wine will realize from the sale (issuance) of the bonds:

(500000*8%)*((1-((1+0.08/2)^(-10*2)))/(0.08/2)) = 543613.05

2) 360000=(78900)*((1-((1+r)^-6))/r) = 8% or use this formula in excel =RATE(6,78900,-360000) = 8%

3) FV==100000*(1.03)^10=$134,391.64

ABC have $134,391.64 in the account after five years if interest is reinvested. Please refer below table for detailed calculation

Period	Principal	Interest @ 3%	Principal + Interest
1	100000.00	3000.00	103000.00
2	103000.00	3090.00	106090.00
3	106090.00	3182.70	109272.70
4	109272.70	3278.18	112550.88
5	112550.88	3376.53	115927.41
6	115927.41	3477.82	119405.23
7	119405.23	3582.16	122987.39
8	122987.39	3689.62	126677.01
9	126677.01	3800.31	130477.32
10	130477.32	3914.32	134391.64

4) PV=80000*((1-(1.1)^-6))/0.1=$348,420.86

If Hiller wants to earn 10% on the investment, $348,420.86 is the amount they should invest on January 1, 2019.

Please refer below table for detailed calculation:

Period	Investment	Int Rec@10%	Receipt from Inv	Total Receipts	Balance Inv
1	348420.89	34842.09	45157.91	80000.00	303262.98
2	303262.98	30326.30	49673.70	80000.00	253589.28
3	253589.28	25358.93	54641.07	80000.00	198948.20
4	198948.20	19894.82	60105.18	80000.00	138843.03
5	138843.03	13884.30	66115.70	80000.00	72727.33
6	72727.33	7272.73	72727.33	80000.00	0.00

5) 500000/(1.08)^7=$291,745.20

alternatively using PV formula in excel =PV(0.08,7,,500000) = $291,745.20. Hence $291,745.20 amount must be deposited today to receive $500,000 after 7 years.

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