Unformatted text preview: ically classified as current liabilities.
Consequently, Melrose Enterprises would have $300,000 in current liabilities and $300,000 in longterm
liabilities for total liabilities of $600,000, and it would have $450,000 in stockholders' equity, which means
that the company could borrow a total of $900,000 without violating its debt covenant. Consequently,
Melrose Enterprises could borrow an additional $300,000. Declaring but not paying the dividend, as
opposed to declaring and paying the dividend, reduced the amount of money that the company could
borrow on a dollarfordollar basis. E11–2
a.
1/1/11 1/1/12 1/1/13 1/1/14 1/1/15 $30,000 $30,000 $30,000 $30,000 1/1/16
$30,000 $300,000
b. All dollar amounts on the time line below are in thousands of dollars.
1/11 7/11
$15 1/12
$15 7/12
$15 1/13
$15 7/13
$15 1/14
$15 7/14
$15 1/15
$15 7/15
$15 1/16
$15 $300 c. Total Present Value = Present Value of Face Value + Present Value of Periodic Interest
Payments (1 ) Annual interest payments:
Total Present Value = ($300,000 Present Value Factor for i = 10% and n = 5) +
($30,000 Present Value Factor of an Ordinary Annuity
Factor for i = 10% and n = 5)
= ($300,000 .62092 from Table 4, Appendix A) + ($30,000 3.79079 from Table 5, Appendix A)
= $186,276 + $113,724
= $300,000 (2 ) Semiannual interest payments:
Total Present Value = ($300,000 Present Value Factor for i = 5% and n = 10) +
($15,000 Present Value Factor of an Ordinary Annuity Factor
for i = 5% and n = 10)
= ($300,000 .61391 from Table 4, Appendix A) + ($15,000 7.7218 from Table 5, Appendix A)
= $184,173 + $115,827
= $300,000 E11–3
1
2
3
4 Par value
Discount
Premium
Premium E11–4
Present Value = Present Value of Face Value + Present Value of Interest Payments
Note 1
Present Value Note 2
Present Value Note 3
Present Value Note 4
Present Value Note 5
Present Value = ($1,000 Present Value Factor for i = 8% and n = 4) + [($1,000 0%) Present Value of an Ordinary Annuity Factor for i = 8% and n = 4]
= $1,000 .7350 (from Table 4 in Appendix A) + $0
= $735.00 = ($5,000 Present...
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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
 staff
 Accounting

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