Chadwick Enterprises, Inc., operates several restaurants throughout the Midwest. Three of its restaurants located in the center
of a large urban area have experienced declining profits due to declining population. The company’s management has decided to test the assets of the restaurants for possible impairment. The relevant information for these assets is presented below.
Book value $ 7.5 million
Estimated undiscounted sum of future cash flows 4.5 million
Fair value 4.0 million
Required:
1. Determine the amount of the impairment loss. (Enter your answer in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)
2. Determine the amount of the impairment loss assuming that the estimated undiscounted sum of future cash flows is $7.8 million and fair value is $5.5 million.
Book value $ 7.5 million
Estimated undiscounted sum of future cash flows 4.5 million
Fair value 4.0 million
Required:
1. Determine the amount of the impairment loss. (Enter your answer in millions rounded to 1 decimal place, (i.e., 5,500,000 should be entered as 5.5).)
2. Determine the amount of the impairment loss assuming that the estimated undiscounted sum of future cash flows is $7.8 million and fair value is $5.5 million.
1 answer:
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Answer:
the annual pre-tax cost of debt is 10.56%
Explanation:
the beore-tax component cost of debt will be the actual market rate of the bonds, as they offer an interest rate of 11% but are selling at 104 points not at par thus, there is a difference between the rates.
We solve for the rate which makes the coupon and maturity 104
with excel or a financial calculator
PV of the coupon payment
C 5.500 (100 x 11%/2)
time 60 (30 years x 2 payment per year)
rate <em>0.052787474</em>
PV $99.4338
PV of the maturity
Maturity 100.00
time 60.00
rate <em>0.052787474</em>
PV 4.57
<em><u>Adding both we should get 104 which is the amount the bonds is selling:</u></em>
PV coupon $99.4338 + PV maturity $4.5662 = $104.0000
The rate is generated using goal seek or wiht a financial calculator.
This rate is a semiannual rate, so we multiply by 2 to get the annual cost of debt:
0.052787474 x 2 = 0.105574947
The cost of debt for the firm is 10.56%