Long-term debt : This is a financial or lease obligation, owed by a company, which have a maturity of more than 12-month period. To discuss : The ethical issues related to the issue of long-term bonds, without disclosing the plans of additional issue of long-term bonds

Question

Debt Retirement. Crouse Inc. is a manufacturer of electronic components for facsimile equipment. The company financed the expansion of its production facilities by issuing $100 million of ten-year bonds carrying a coupon rate of 6.5 percent with interest payable annually on December 31. The bonds had been issued on January At the time of the issuance, the market rate of interest on similar risk-rated instruments was six percent Two years later, the market rate of interest on comparable debt instruments had climbed to eight percent. The CEO of Crouse realized that this might be an opportune time to repurchase the bonds, particularly because an unexpected surplus of cash made the outstanding debt no longer necessary. Required: Calculate the amount of cash needed to retire the debt after two years assuming a market yield rate of twelve percent. Calculate the resulting gain or loss. Where will the gain/loss be reported on the company’s statement of cash flow?

Answer 1

Question

Chapter 12, Problem 12.1CP

To determine

Long-term debt: This is a financial or lease obligation, owed by a company, which have a maturity of more than 12-month period.

To discuss: The ethical issues related to the issue of long-term bonds, without disclosing the plans of additional issue of long-term bonds

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Debt Retirement. Crouse Inc. is a manufacturer of electronic components for facsimile equipment. The company financed the expansion of its production facilities by issuing $100 million of ten-year bonds carrying a coupon rate of 6.5 percent with interest payable annually on December 31. The bonds had been issued on January At the time of the issuance, the market rate of interest on similar risk-rated instruments was six percent Two years later, the market rate of interest on comparable debt instruments had climbed to eight percent. The CEO of Crouse realized that this might be an opportune time to repurchase the bonds, particularly because an unexpected surplus of cash made the outstanding debt no longer necessary. Required: Calculate the amount of cash needed to retire the debt after two years assuming a market yield rate of twelve percent. Calculate the resulting gain or loss. Where will the gain/loss be reported on the company’s statement of cash flow?

Debt Retirement. Crouse Inc. is a manufacturer of electronic components for facsimile equipment. The company financed the expansion of its production facilities by issuing $100 million of ten-year bonds carrying a coupon rate of 6.5 percent with interest payable annually on December 31. The bonds had been issued on January At the time of the issuance, the market rate of interest on similar risk-rated instruments was six percent Two years later, the market rate of interest on comparable debt instruments had climbed to eight percent. The CEO of Crouse realized that this might be an opportune time to repurchase the bonds, particularly because an unexpected surplus of cash made the outstanding debt no longer necessary. Required: Calculate the interest expense for each of the two years that the bonds were outstanding.

Debt Retirement. Crouse Inc. is a manufacturer of electronic components for facsimile equipment. The company financed the expansion of its production facilities by issuing $100 million of ten-year bonds carrying a coupon rate of 6.5 percent with interest payable annually on December 31. The bonds had been issued on January At the time of the issuance, the market rate of interest on similar risk-rated instruments was six percent Two years later, the market rate of interest on comparable debt instruments had climbed to eight percent. The CEO of Crouse realized that this might be an opportune time to repurchase the bonds, particularly because an unexpected surplus of cash made the outstanding debt no longer necessary. Required: Calculate the proceeds received by the company when the debt was initially sold.