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777dan777 [17]
2 years ago
14

Wilson Dover Inc. The total value (debt plus equity) of Wilson Dover Inc. is $500 million and the face value of its 1-year coupo

n debt is $200 million. The volatility (σ) of Wilson Dover's total value is 0.60, and the risk-free rate is 5%. Assume that N(d1) = 0.9720 and N(d2) = 0.9050. Refer to the data for Wilson Dover Inc. What is the yield on Wilson Dover's debt? a. 7.05% b. 6.04% c. 6.70% d. 7.42% e. 6.36%
Business
1 answer:
Nutka1998 [239]2 years ago
6 0

Answer:

7.42%

Explanation:

Value = 500 million

Amount of debt = 200 million

Time = year

Volatility = 6%

Risk free rate = 0.05

Nd1 = 0.9720

Nd2 = 0.9050

We have to calculate the value =

500 - (500 x 0.9720 - 200 x e^-0.05 x 0.9050)

= 186.17 million

We now calculate the yield

(200/186.17)^1 - 1

= 0.0742

= 7.42%

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weqwewe [10]

The preparation of the related journal entries for each period for ABC Co. is as follows:

<h3>Journal Entries:</h3>

2001/12/31 Debit Bonds Receivable $100,000

Debit Bonds Premium $2,723

Credit Cash $102,723

2002/12/31 Debit Cash $6,000

Credit Interest Revenue $5,136

Credit Amortization of Bonds Premium $864

2003/12/31 Debit Cash $6,000

Credit Interest Revenue $5,093

Credit Amortization of Bonds Premium $907

2004/9/30 Debit Cash $105,500

Credit Interest Revenue $3,786

Credit Amortization of Bonds Premium $952

Credit Bonds Receivable $100,000

Credit Realized Gain $762

<h3>Data and Calculations:</h3>

Periods          Cash     Interest Revenue      Premium        Carrying Value

                   Receipt                                  Amortization

2001/12/31                                                                                    102,723

2002/12/31     6,000             5,136                   864                    101,859

2003/12/31     6,000            5,093                   907                   100,952

2004/12/31     6,000            5,048                   952                   100,000

The fair market value of the bonds:

Periods Fair Market Value

2002/12/31 104,200

2003/12/31 103,000

2004/9/30 105,500

<h3>Journal Entries Analysis:</h3>

2001/12/31 Bonds Receivable $100,000 Bonds Premium $2,723 Cash $102,723

2002/12/31 Cash $6,000 Interest Revenue $5,136 Amortization of Bonds Premium $864

2003/12/31 Cash $6,000 Interest Revenue $5,093 Amortization of Bonds Premium $907

2004/9/30  Cash $105,500 Interest Revenue $3,786 Amortization of Bonds Premium $952 Bonds Receivable $100,000 Realized Gain $762

Learn more about recording bond transactions at brainly.com/question/16048929

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Answer:

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