Hassan Mustafa has recently started his new job as a financial manager in a firm called ScanSoft. ScanSoft is developing a new process to manufacture optical disks. The development costs were higher than expected, so ScanSoft requires an immediate cash inflow of $5,200,000. To raise the required capital, the company decided to issue bonds. Since ScanSoft had no expertise in issuing and selling bonds, Hassan suggested that the company work with an investment dealer. The investment dealer bought the company's entire bond issue at a discount, and then planned to sell the bonds to the public at face value or the current market value. To ensure it would raise the $5,200,000 it required, ScanSoft plans to issue 5200 bonds with a face value of $1000 each, on January 20, 2021. Interest is paid semi-annually on July 20 and January 20, beginning July 20, 2021. The bonds pay interest at 5.5% compounded semi- annually. Hassan Mustafa realized that when the bonds mature on January 20, 2041, there must be $5,200,000 available to repay the bondholders. To have enough money on hand to meet this obligation, He suggested that ScanSoft set up a sinking fund (an interest-bearing account into which payments are made at regular intervals to provide a desired sum of money at a specified future time) using a specially designated savings account. The company earns interest of 1.6% compounded semi-annually on this sinking fund account. ScanSoft began making semi-annual payments to the sinking fund on July 20, 2021. ScanSoft issued the bonds, sold them all to the investment dealer, and used the money raised to continue its research and development. 1. How much would an investor have to pay for one of these bonds to earn 4.4% compounded semi-annually?
Hassan Mustafa has recently started his new job as a financial manager in a firm called ScanSoft. ScanSoft is developing a new process to manufacture optical disks. The development costs were higher than expected, so ScanSoft requires an immediate cash inflow of $5,200,000. To raise the required capital, the company decided to issue bonds. Since ScanSoft had no expertise in issuing and selling bonds, Hassan suggested that the company work with an investment dealer. The investment dealer bought the company's entire bond issue at a discount, and then planned to sell the bonds to the public at face value or the current market value. To ensure it would raise the $5,200,000 it required, ScanSoft plans to issue 5200 bonds with a face value of $1000 each, on January 20, 2021. Interest is paid semi-annually on July 20 and January 20, beginning July 20, 2021. The bonds pay interest at 5.5% compounded semi- annually. Hassan Mustafa realized that when the bonds mature on January 20, 2041, there must be $5,200,000 available to repay the bondholders. To have enough money on hand to meet this obligation, He suggested that ScanSoft set up a sinking fund (an interest-bearing account into which payments are made at regular intervals to provide a desired sum of money at a specified future time) using a specially designated savings account. The company earns interest of 1.6% compounded semi-annually on this sinking fund account. ScanSoft began making semi-annual payments to the sinking fund on July 20, 2021. ScanSoft issued the bonds, sold them all to the investment dealer, and used the money raised to continue its research and development. 1. How much would an investor have to pay for one of these bonds to earn 4.4% compounded semi-annually?
Chapter7: Valuation Of Stocks And Corporations
Section: Chapter Questions
Problem 1lM
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Transcribed Image Text:Hassan Mustafa has recently started his new job as a financial manager in a firm called
ScanSoft. ScanSoft is developing a new process to manufacture optical disks. The development
costs were higher than expected, so ScanSoft requires an immediate cash inflow of $5,200,000.
To raise the required capital, the company decided to issue bonds. Since ScanSoft had no
expertise in issuing and selling bonds, Hassan suggested that the company work with an
investment dealer. The investment dealer bought the company's entire bond issue at a
discount, and then planned to sell the bonds to the public at face value or the current market
value. To ensure it would raise the $5,200,000 it required, ScanSoft plans to issue 5200 bonds
with a face value of $1000 each, on January 20, 2021. Interest is paid semi-annually on July 20
and January 20, beginning July 20, 2021. The bonds pay interest at 5.5% compounded semi-
annually.
Hassan Mustafa realized that when the bonds mature on January 20, 2041, there must be
$5,200,000 available to repay the bondholders. To have enough money on hand to meet this
obligation, He suggested that ScanSoft set up a sinking fund (an interest-bearing account into
which payments are made at regular intervals to provide a desired sum of money at a specified
future time) using a specially designated savings account. The company earns interest of 1.6%
compounded semi-annually on this sinking fund account. ScanSoft began making semi-annual
payments to the sinking fund on July 20, 2021.
ScanSoft issued the bonds, sold them all to the investment dealer, and used the money raised
to continue its research and development.
1. How much would an investor have to pay for one of these bonds to earn 4.4%
compounded semi-annually?
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