Down below I’ll attach the case study you just read the 1 page case and answer the questions it comes with.
Hi Students: For the case study, you can just answer the questions on the last page. Here are a few tips however that might make those questions more clear.
First of all, a couple of general tips:
* The case says to use the factors from the present value tables. You can do that if you want, but it would seem much easier to just use your financial calculator, or to use the TVM functions in Excel.
*Note that for questions 1, 2 and 3. It asks for an amortization table. The template I posted for “Premium or Discount Amortization” will work well for that. Also, note that on the amortization table, you should be working with the total amount of bonds outstanding. In the past, I’ve seen students going back and forth between amortizing the premium or discount on a single bond, versus, dealing with the total amount of bonds outstanding. You’re supposed to deal with the total.
here are some tips related for each specific question:
#1. This is asking for an amortization schedule that assumes that you issue enough zero-coupon bonds to raise $1 million, when the effective interest rate is 10%. The bonds will sell at a relatively large discount because they have no coupon payments, so your total face value of bonds will be quite a bit more than $1 million.
#2. So as an alternative to zero-coupon bonds in question 1, question 2 wants you to analyze the issuance of 10% coupon bonds, when the effective interest rate is 8%. Obviously, these bonds will sell at a premium, so you’ll actually be raising more than $1 million.
#3 – In question #3, we’re back to issuing zero-coupon bonds, but this time with an effective rate of 8% instead of 10% used in question 1. Again the key question is what will be the total face value of these bonds due at maturity, if you have to issue enough to raise $1 million up front.
#4. Finally, question #4 just asks what you would do? Please don’t say you would issue the lowest interest rate bonds… That is obvious. In fact you can’t control the effective interest rate in the market. So you need an answer that is a little more practical than that.
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laurinburg engineering case accounting was first posted on August 6, 2020 at 4:24 am.
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