Question

The purpose of this calculation question is for you to compute the fair value of the financial liabilities of Hue Company.

Hue Company has only 1 financial liability. It is a non-callable publicly traded bond. Here are your facts to input into this question:

• Maturity value of the bond = $260,000,000
• Coupon Rate for the bond is 5.38% paid semi-annually.
• Bond matures on the last day of the firm’s financial year.
• Last Financial Year end – the yield to maturity was 4.80% based on periodic compounding (not EAR)
• Last Financial Year end – bond had exactly 18 years to maturity
• This Year Financial Year end – the yield to maturity demanded by the market is 4.30% (based on doubling the periodic rate)

Required: Compute the fair value of the bond to be reported on this year’s balance sheet. Round to the nearest dollar and do NOT include the dollar sign in your response.

Answer 1

The remaining period to maturiy is 18 years

coupon rate for the bond is 5.38%(10.76% annualy)

We use the market interest rate of this finanaical year end is 4.30%(8.60% annualy) for detemining present value of bond.

Present value of Bond.

calculation of present value	$        260,000,000.00
Yeary	Interest(10.76%)	Present value factor	Present value
1	27,976,000.00	0.921	25,760,589
2	27,976,000.00	0.848	23,720,616
3	27,976,000.00	0.781	21,842,188
4	27,976,000.00	0.719	20,112,512
5	27,976,000.00	0.662	18,519,809
6	27,976,000.00	0.610	17,053,231
7	27,976,000.00	0.561	15,702,791
8	27,976,000.00	0.517	14,459,292
9	27,976,000.00	0.476	13,314,265
10	27,976,000.00	0.438	12,259,912
11	27,976,000.00	0.404	11,289,054
12	27,976,000.00	0.372	10,395,077
13	27,976,000.00	0.342	9,571,894
14	27,976,000.00	0.315	8,813,899
15	27,976,000.00	0.290	8,115,929
16	27,976,000.00	0.267	7,473,231
17	27,976,000.00	0.246	6,881,428
18	27,976,000.00	0.226	6,336,490
18	260,000,000.00	0.226	58,889,314
	Total	310,511,521

The present value of bond is 310,511,521.