48732fromtable5inappendixa issueprice 65380000

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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 ID11–1 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.

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