JINESSACE MY ?NSTRUCTORI\' FULL SCREEN PR?N?ERVERS?ON 1.BACK NEXT Brief Exercise

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JINESSACE MY ?NSTRUCTORI' FULL SCREEN PR?N?ERVERS?ON 1.BACK NEXT Brief Exercise G-17 Crane Company issued 8%, 8-year, $2,691,400 par value bonds that pay interest semiannually on October 1 and April 1 The bonds are dated April 1 2019, and are issued on that date. The discount rate of interest for such bonds on April 1, 2019, is 8%. Click here to view the factor table 1 Click here to view the factor table 2, Click here to view the factor table 3, Click here to view the factor table 4 What cash proceeds did Crane receive from issuance of the bonds? (For calculation purposes, use 5 decimal places as displayed in the factor table provided, e.g. 5.24571. Round answer to 0 decimal places, e.g. 125.) Cash proceeds from issuance of the bonds s Click if you would like to Show Work for this question: Open Show Work

Explanation / Answer

1. Amount of each semi-annual interest payment of the bonds.

Semi-annual cash interest payments =($2,691,400 × 8%)/2= $107,656

The interest of 8% is annual interest. So to convert the interest to semiannual we have divided the annual interest amount by 2 above i.e. 6months/12months=1/2

2.Number of Semi-annual interest payment on the bonds.

Number of payments= 2 payments per year for 8 years = 16 payments.

Now computation of cash proceeds from issuance of bond

There are two cashflows :a) Par value (Maturity value) and b) Equal Interest payment

Before applying the present value factor for determining the cash proceeds we need to calculate the following:

Market interest rate revised =8%/2= 4% (Interest is paid semiannually ,therefore divided by 2

Revised period = 8 years ×2 = 16 periods

Now determine the cash proceeds as follows:

Cash flows

a)Par Value (Maturity Value)= 2,691,400 ×0.53391= 1,436,965(This is present value of par value i.e .Maturity value)

0.53391 is taken from the present value of $1 table. Refer to this table and see for 4% rate , 16 period, you will get the value 0.53391

b) Interest =107,656 ×11.65230= $1,254,440(This is present value of interest)

Equal interest of $107,656 is paid for the 16 period. So to get 11.65230 we have to refer to the Present value annuity factor table 4% rate and 16 th period.

Therefore Cash proceeds from issuance of the bonds= a + b= $ 1,436,965 + $ 1,254,440 =$2,691,405

In this case bond is issued at par value.

Here, Market rate of interest is equal to interest rate of bond .So bond is selling at par.

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