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Unformatted text preview: Revenue
Receipt of interest payment on 5/31/2012
(3,789 = Eff. Rate per period of 4% X [92,994 + 1,720]) 3,789 c. On May 31, 2012 the book value of the investment is $96,503 (92,994 + 1,720 + 1,789). On the same
date, if market interest rates are 6% the market value of the investment is $98,087 (PV of a $2,000
ordinary annuity, n=2, r = 3 plus PV of a single sum of $100,000, n = 2, r = 3). ISSUES FOR DISCUSSION
a. A debenture is an unsecured bond. That is, there is no collateral supporting the bond. Thus, should the
company not repay the bonds, investors do not have security in any of the company's assets that could be
sold to repay the bonds. For this reason, unsecured bonds are riskier than secured bonds. Investors are
compensated for this increased risk on debentures through a higher return (i.e., effective interest rate).
Accordingly, these bonds would be priced lower than a secured bond in the same company. b. There are three general reasons why a company would repurchase its outstanding debt. First, the
company may no longer need the money it borrowed. By repurchasing the debt, the company could avoid
incurring interest. Second, due to a decrease in interest rates, the company may have repurchased its
debt with the intent of issuing new debt at the lower prevailing interest rates. Finally, the company may
repurchase some of its debt in an effort to improve its balance sheet. This would generally be in an effort to
improve some financial ratios specified in debt covenants. c. Repurchasing debt would decrease both a company's liabilities (due to the amount of debt repurchased)
and its assets (due to the cash paid out to repurchase the debt). For Sun Company, its stockholders'
equity would also decrease because it paid out $957.50 for each bond when the book value of a bond was
only $875. Thus, Sun Company would have a loss of $82.50 on each bond repurchased, which would
decrease stockholders' equity through closing the loss into Retained Earnings. d. Sun Com...
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This homework help was uploaded on 03/03/2014 for the course ACCT 5053 taught by Professor Staff during the Fall '08 term at Oklahoma State.
- Fall '08