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Georgia [21]
3 years ago
5

Gargoyle Unlimited Gargoyle Unlimited is planning to issue a zero coupon bond to fund a project that will yield its first positi

ve cash flow in three years. That cash flow will be sufficient to pay off the entire debt issue. The bond's par value will be $1,000, it will mature in 3 years, and it will sell in the market for $727.25. The firm's marginal tax rate is 40 percent. Refer to Gargoyle Unlimited. What is the expected after-tax cost of this debt issue
Business
1 answer:
asambeis [7]3 years ago
5 0

Answer:

The answer is 6.72%

Explanation:

Calculating the imputed rate from a discount bond as follows:

( 1 + i  )^n = FV / PV  

( 1 + i )^3 = FV / PV,   here FV= 1000 and PV= 727.25

so putting values in equation we have:

( 1 +i )^3 = 1000 / 727.25  

( 1 + i )^3 = 1.375  

solving for i

( 1 + i) = 1.375^1/3  

( 1 + i ) = 1.112  

i = 0.112 before tax rate

0.112 * (1 - tax rate) = after tax interest rate

0.112 * .60 = 0.0672 = 6.72%

thus the expected after tax cost of this debt issue is 6.72%

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Answer: Please refer to Explanation

Explanation:

Hello. Your question was not complete as it lacked certain options.

I have attached it to this answer.

1.Paid $7,000 of accrued taxes at the time the plant site was acquired. LAND because it was an expense that was needed to acquire the land so it is capitalized

2. Paid $200 insurance to cover a possible accident loss on new factory machinery while the machinery was in transit. EQUIPMENT

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3 years ago
On February 1, 2021, Strauss-Lombardi issued 8% bonds, dated February 1, with a face amount of $810,000. The bonds sold for $735
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Answer and Explanation:

According to the scenario, computation of the given data are as follow:-

Interest paid semiannually on July 31, and Jan 31,

so the rate of interest is :- 9% × 6÷12 = 4.5%  and  8% × 6÷12 = 4%

Date    Interest         Paid interest 4%         Amortized         Carrying value

       expenses 4.50%                             discount amount

February,1                                                    $735,474

July,31 $33,096   -   $32,400                    $696            $736,170

Jan.31      $33,128   -   $32,400                    $728            $736,898

Working note =

Paid interest = $810,000 × 4÷100 = 32,400

Interest expenses in July,31 = $735,474 × 4.5 ÷ 100

= 33,096.33 or $33,096

Interest expenses in January,31 = $736,170 × 4.5÷100

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Carrying Value = Previous Carrying Value + Amortized Discount Amount

July,31

= $735,474 + $696

= $736,170

Jan,31 =  $736,170 + $728 = $736,898

Journal Entry

Feb,1  Cash A/c Dr. $735,474

  Discount on bonds payable A/c Dr. $74,526

  To bonds payable A/c      $810,000

         (To Record the issuance of bond)

July,31 Interest expense A/c Dr. $33,096

     To Discount on bonds payable A/c  $696

     To Cash A/c $32,400

            (To Record the interest expense)

Dec,31  Interest expense A/c Dr. $27,606

      (9% × 5÷12) × $736,170

     To Discount on bonds payable A/c $606

     To Cash A/c $27,000    (8% × 5÷12) × $810,000  

           (To Record the accrued interest)

Jan,31  Interest expense A/c Dr. $5,522

    Interest payable A/c Dr. $27,000

    To Cash A/c $32,400

    To Discount on bonds payable A/c $122

 ($728 - $606) = $122

          (To Record the interest on January)

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