879 40000 47918100000 p114 a notea facevalue 20000

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Unformatted text preview: unt. The bond market has determined that purchasers of Hartl Enterprises' bonds should earn an annual return on their investment of 10%. However, Hartl Enterprises is offering interest equal to only 8%. Since the stated interest rate cannot be changed, the only way that the investors can earn their 10% return is to invest a smaller amount in Hartl Enterprises. They will still receive the same future cash flows. Consequently, the bonds will be issued at a price that allows the investors to earn a return of exactly 10% on their investment. b. Face value $ 10,000 Present value (i = 5%, n = 20) PV of maturity receipt ($10,000 .3769 from Table $ 3,769 4 in Appendix A) PV of interest receipts ($400 12.4622 from Table 4,985 5 in Appendix A) Total present value 8,754 Discount $ 1,246 Cash (+A) Discount on Bonds Payable (–L) 8,754 1,246 Bonds Payable (+L) 10,000 Issued bonds. c. Interest Expense (E, –SE) Payable (+L) 218.85a Discount on Bonds 18.85b Interest Payable (+L) 200.00c Accrued interest payable. a $218.85 b $18.85 c $200.00 d. = = = = = Book value Effective rate per period Portion of period outstanding $8,754 5% 3/6 Interest expense – Interest payable Face value Stated rate per period Portion of period outstanding $10,000 4% 3/6 Interest Expense (E, –SE) Interest Payable (–L) 218.85 200.00 Discount on Bonds Payable (+L) 18.85 Cash (–A) 400.00 Made interest payment. P11–3 a. L­T Debt/Equity Ratio b. Proceeds = Total Long­Term Liabilities ÷ Total Stockholders' Equity = $40,000 ÷ $100,000 = 0.4 = Present Value of Future Cash Flows Discounted at 11% for 5 Periods = $40,000 .59345 (from Table 4 in Appendix A) = $23,738 If Manheim Corporation borrows this $40,000, its long­term debt/equity ratio would be .637 [($40,000 + $23,738) ÷ $100,000]. c. Proceeds = Present Value of Future Cash Flows Discounted at 4% for 40 Periods = Present Value of the Face Value + Present Value of Interest Payments = ($40,000 .20829 from Table 4 in Appendix A) + [($40,000 5%) 19.7927...
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