2. Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained detachable...

2. Ray Corp. issued bonds with a face amount of $200,000. Each $1,000 bond contained

detachable stock warrants for 100 shares of Ray's common stock. Total proceeds from the

issue amounted to $240,000. The market value of each warrant was $2, and the market value

of the bonds without the warrants was $196,000. The bonds were issued at a discount of

(rounding the allocation percentage to two decimal places):

a. $0

b. $800

c. $4,000

d. $33,898

Solutions

Expert Solution

First, we have to allocate the $ 240000 proceeds received into bond and equity portion using proportionla method. Under proportional method, proceeds is allocated to equity and bond portion on the basis of Market value

Calculation of Market Value

Bonds Market value without warrants = $ 196000

Market value of warrants = No. of bonds * stock warrants per bond * market value per warrants

= (200000/1000)*100*2 = 200*100*2 = $ 40000

Calculation of relative portion

Particulars	Market Value	Allocation %
Bonds without warrant	$ 196000	196000/236000*100 =83.05%
Warrants	$ 40000	40000/236000 *100 = 16.95%
Total	$ 236000	100%

So bonds portion =Bonds allocation % * Total proceeds = 83.05% * 240000 = 199320

so Bonds are issued at a discount of $ 680 (200000-199320)

Please Note: Answer is coming to $ 680 which is not there in option, however if we take the allocation % as 83%, then discount = 200000- (83%of 240000) = 200000 - 199200 = $ 800

ekkarill92 answered 1 year ago

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