CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
5th Edition
ISBN: 9781305661653
Author: Scott Besley, Eugene Brigham
Publisher: Cengage Learning
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Chapter 3, Problem 10PROB
Summary Introduction
JRC needs $240 million to support operations. To raise the needed funds, the firm issued bonds at $1,000 each bond. The flotation cost is 4%. Calculate the number of outstanding bonds to be issued.
Debt financing is the process of raising debt capital by issuing shares to investors due to short-term need or long-term goal or for the future growth of the firm.
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Jewel Regal Cars (JRC) must raise $240 million to support operations. To do so, JRC plans to issue new bonds. Investment bankers have informed JRC that the flotation costs will be 4% of the total amount issued. If the market value of each bond is $1,000, how many bonds must JRC sell to net the $240 million that it needs? There are no other issuing expenses or fees in the offering.
Mom's Motel Corporation (MM) plans to issue bonds to raise $175 million that it needs to support future operations. MM's investment banker will charge flotation costs of 2.5% of the total amount issued to help MM raise the funds. In addition, MM will incur other costs associated with the issue that equal $500,000. The market value of each bond at issue time will be $1,000. How many bonds must GM sell to net $175 million that it needs?
Wilderness World (WW) needs to raise $84 million in debt. To issue the debt, WW must pay its underwriter a fee equal to 3% of the issue. The company estimates that other expenses associated with the issue will total $487,000. If the face value of each bond is $1,000, how many bonds must be issued to net the needed $84 million?
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CFIN (with Online, 1 term (6 months) Printed Access Card) (New, Engaging Titles from 4LTR Press)
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- Suppose the Schoof Company has this book value balance sheet: The notes payable are to banks, and the interest rate on this debt is 10%, the same as the rate on new bank loans. These bank loans are not used for seasonal financing but instead are part of the companys permanent capital structure. The long-term debt consists of 30,000 bonds, each with a par value of 1,000, an annual coupon interest rate of 6%, and a 20-year maturity. The going rate of interest on new long-term debt, rd, is 10%, and this is the present yield to maturity on the bonds. The common stock sells at a price of 60 per share. Calculate the firms market value capital structure.arrow_forwardABC company will contract a new loan in the sum of $2,000,000 that is secured by machinery and the loan has an interest rate of 6 percent. The company has also issued 4,000 new bond issues with an 8 percent coupon, paid semi-annually, and matures in 10 years. The bonds were sold at par and incurred a floatation cost of 2 percent per issue. 1. Does the New loan have anything to do with calculating the cost of debt? 2. Should the new loan be considered in the calculation of the weighted average cost of capital (WACC) of the company? if so how should it be added to the WACC formula.arrow_forwardHeadland Inc. has decided to raise additional capital by issuing $191,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $144,000, and the value of the warrants in the market is $16,000. The bonds sold in the market at issuance for $140,000.(a) What entry should be made at the time of the issuance of the bonds and warrants? b1) Prepare the entry if the warrants were nondetachablearrow_forward
- Sweet Inc. has decided to raise additional capital by issuing $162,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,850, and the value of the warrants in the market is $24,150. The bonds sold in the market at issuance for $145,500.(a) What entry should be made at the time of the issuance of the bonds and warrants? (b1) Prepare the entry if the warrants were nondetachable.arrow_forwardU.S. Delay Corporation, a subsidiary of the postal service, must decide whether to issue zero coupon bonds or quarterly payment bonds to fund construction of new facilities. The $1,000 par value quarterly payment bonds would sell at $795.54, have a 4.50% coupon rate, and mature in 10 years. At what price would the zero coupon bonds with a maturity of 10 years have to sell to earn the same effective annual rate (or bond yield) as the quarterly payment bonds?arrow_forwardKiss Greetings planned to raise $500,000 by issuing bonds. The bond certificates were printed bearing a stated interest rate of 6%, which was equal to the yield rate of interest. However, before the bonds could be issued, economic conditions forced the yield rate up to 7%. If the life of the bonds is 10 years and interest is paid annually on December 31, how much will the company receive from the sale of the bonds? Group of answer choices Less than $500,000 because the 7% yield rate of interest was higher than the stated rate. The 6% bonds will not be sold at all. The company will be required to have the certificates reprinted bearing the new yield rate of 7%. Exactly $500,000 because the company would still pay interest at the stated rate. More than $500,000 because the 6% stated rate of interest was less than the yield rate.arrow_forward
- Illiad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000.(b2) If the warrants were nondetachable, would the entries be different?arrow_forwardIlliad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000. Instructions a. What entry should be made at the time of the issuance of the bonds and warrants? b. If the warrants were nondetachable, would the entries be different? Discuss.arrow_forwardIlliad Inc. has decided to raise additional capital by issuing $170,000 face value of bonds with a coupon rate of 10%. In discussions with investment bankers, it was determined that to help the sale of the bonds, detachable stock warrants should be issued at the rate of one warrant for each $100 bond sold. The value of the bonds without the warrants is considered to be $136,000, and the value of the warrants in the market is $24,000. The bonds sold in the market at issuance for $152,000.(b2) If the warrants were nondetachable, would the entries be different? Discuss.arrow_forward
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