Exercise 9-1 (LO 9-1)
Requirement 1
Issue Bonds Issue Stock
Operating income $11,000,000 $11,000,000
Interest expense (bonds only) 2,450,000
Income before tax 8,550,000 11,000,000
Income tax expense (35%) 2,992,500 3,850,000
Net income $ 5,557,500 $ 7,150,000
Requirement 2
Issuing stock results in higher earnings per share. Issuing bonds results in earnings
Exercise 9-2 (LO 9-2)
Terms
__e___ 1. Sinking fund.
__g___ 2. Secured bond.
__c___ 3. Unsecured bond.
__f___ 4. Term bond.
__b___ 5. Serial bond.
__a___ 6. Callable bond.
__d___ 7. Convertible bond.
__h___ 8. Bond issue costs.
Definitions
a. Allows the issuer to pay off the bonds early at a fixed price.
b. Matures in installments.
c. Secured only by the “full faith and credit” of the issuing corporation.
d. Allows the investor to transfer each bond into shares of common stock.
e. Money set aside to pay debts as they come due.
Exercises
Exercise 9-3 (LO 9-3)
Requirement 1
Premium. The issue price is $45,057,519
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $41,000,000
2. Interest payment PMT $1,845,000 = $41,000,000 x 9% x ½ year
Calculator Output
Issue price PV $45,057,519
Requirement 2
Face amount. The issue price is $41,000,000.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $41,000,000
2. Interest payment PMT $1,845,000 = $41,000,000 x 9% x ½ year
Calculator Output
Issue price PV $41,000,000
Requirement 3
Discount. The issue price is $37,482,387
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $41,000,000
2. Interest payment PMT $1,845,000 = $41,000,000 x 9% x ½ year
Calculator Output
Issue price PV $37,482,387
Exercise 9-4 (LO 9-3)
Requirement 1
Premium. The issue price is $27,934,072.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $26,000,000
2. Interest payment PMT $910,000 = $26,000,000 x7% x ½ year
Calculator Output
Requirement 2
Face amount. The issue price is $26,000,000.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $26,000,000
2. Interest payment PMT $910,000 = $26,000,000 x 7% x ½ year
Calculator Output
Issue price PV $26,000,000
Requirement 3
Discount. The issue price is $24,233,258.
Calculator Input
Bond
Characteristics Key Amount
1. Face amount FV $26,000,000
2. Interest payment PMT $910,000 = $26,000,000 x 7% x ½ year
Calculator Output
Issue price PV $24,233,258
Exercise 9-5 (LO 9-4)
January 1, 2015
Cash 500,000
June 30, 2015
Interest Expense 22,500
December 31, 2015
Interest Expense 22,500
Exercise 9-6 (LO 9-4)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 4.5% Stated
Rate
Carrying Value
x 5% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 457,102
Requirement 2
January 1, 2015
Cash 457,102
June 30, 2015
Interest Expense 22,855
Bonds Payable (difference) 355
December 31, 2015
Interest Expense 22,873
Bonds Payable (difference) 373
Exercise 9-7 (LO 9-4)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 4.5% Stated
Rate
Carrying Value
x 4% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
1/ 1 /15 $ 549,482
Requirement 2
January 1, 2015
Cash 549,482
June 30, 2015
Interest Expense 21,979
Bonds Payable (difference) 521
December 31, 2015
Interest Expense 21,958
Bonds Payable (difference) 542
Exercise 9-8 (LO 9-4)
January 1, 2015
Cash 600,000
June 30, 2015
Interest Expense 21,000
December 31, 2015
Interest Expense 21,000
Exercise 9-9 (LO 9-4)
Requirement 1
(1) (2) (3) (4) (5)
Date
Cash
Paid
Interest
Expense
Increase in
Carrying
Value
Carrying
Value
Face Amount
x 3.5% Stated
Rate
Carrying Value
x 4% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 559,229
Requirement 2
January 1, 2015
Cash 559,229
June 30, 2015
Interest Expense 22,369
Bonds Payable (difference) 1,369
December 31, 2015
Interest Expense 22,424
Bonds Payable (difference) 1,424
Exercise 9-10 (LO 9-4)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 3.5% Stated
Rate
Carrying Value
x 3% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
1/ 1 /15 $ 644,632
Requirement 2
January 1, 2015
Cash 644,632
June 30, 2015
Interest Expense 19,339
Bonds Payable (difference) 1,661
December 31, 2015
Interest Expense 19,289
Bonds Payable (difference) 1,711
Exercise 9-11 (LO 9-4)
January 1, 2015
Cash 600,000
December 31, 2015
Interest Expense 42,000
December 31, 2016
Interest Expense 42,000
Exercise 9-12 (LO 9-4)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Increase in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 7% Stated
Rate
Carrying Value
x 8% Market
Rate
(3) – (2)
Prior Carrying
Value + (4)
1/ 1 /15 $ 559,740
Requirement 2
January 1, 2015
Cash 559,740
December 31, 2015
Interest Expense 44,779
Bonds Payable (difference) 2,779
December 31, 2016
Interest Expense 45,002
Bonds Payable (difference) 3,002
Exercise 9-13 (LO 9-4)
Requirement 1
(1)
Date
(2)
Cash
Paid
(3)
Interest
Expense
(4)
Decrease in
Carrying
Value
(5)
Carrying
Value
Face Amount
x 7% Stated
Rate
Carrying Value
x 6% Market
Rate
(2) – (3)
Prior Carrying
Value – (4)
1/ 1 /15 $ 644,161