Exercise 6-13 Cullumber Inc. manufactures cycling equipment. Recently, the vice
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Question
Exercise 6-13
Cullumber Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing $3,201,000 of 9% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2017. At the time of issuance, the market interest rate for similar financial instruments is 8%.
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As the controller of the company, determine the selling price of the bonds. (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.)
Explanation / Answer
Note :
Selling price of the bonds = Present Value of bonds
= Semi annual Interest * PVIFA [r / 2 , (n * 2)] + Maturity Value * PVIF [r / 2 , (n * 2)]
Where r = Market rate = 8 % , n = number of periods = 15 years
= $144,045 * PVIFA [4 % , 30] + $3,201,000 * PVIF [4 % , 30]
= ($144,045 *17.29203) + ($3,201,000 * 0.30832)
= 2,490,830+ 986,932 = $3,477,762
Selling price of the bonds = $3,477,762