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olchik [2.2K]
3 years ago
15

Quantitative Problem: 5 years ago, Barton Industries issued 25-year noncallable, semiannual bonds with a $1,000 face value and a

9% coupon, semiannual payment ($45 payment every 6 months). The bonds currently sell for $896.87. If the firm's marginal tax rate is 25%, what is the firm's after-tax cost of debt
Business
1 answer:
Yakvenalex [24]3 years ago
7 0

Answer:

7.67%

Explanation:

The Excel rate function can be used to determine the before-tax cost of debt as follows:

=rate(nper,pmt,-pv,fv)

nper=number of semiannual coupons in the remaining 20 years=20*2=40

pmt=semiannual coupon=$45

pv=current amrket price= $896.87

fv=face value=$1000

=rate(40,45,-896.87,1000)=5.11%

5.11%  is the semiannual yield

yield to maturity=5.11%*2=10.22%

after-tax cost of debt=pretax cost debt*(1-tax rate)

tax rate=25%

after-tax cost of debt=10.22%*(1-25%)=7.67%

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Answer:

1.

Dec 31    Rent expense                   $3450 Dr

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2.

Oct 1     Prepaid Rent                        $13800 Dr

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Explanation:

Assumption: The year end for the business in on 31 December.

1.

The rent is paid in advance thus it is an asset. On 31 December the adjusting entry will be made under the accrual principle to match the current period's rent expense and record it in the period to which it belongs to. Thus we will credit the rent expense for 3 months i.e. October, November and December. We will credit the asset account that is Prepaid Rent.

2.

The prepayment of rent is creating an asset account in the title of prepaid rent. The entry would be to record the asset prepaid rent by the full amount of the rent prepaid and credit the other asset account through which the payment is being made.

3.

The adjusted year end balance for rent expense will be the rent expense paid for this period that is $1150 * 3 = 3450

The balance in the prepaid rent account after adjusting the rent expense will be,

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Explanation:

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Example 1: The price for a toy in a toy shop is $4.99, if rounded this will be $5 but the whole number visible is $4.

Example 2: The price of a laptop is $193, this again is nearly $200 but the price is reduced by $7 in order to influence their customers into buying the product.

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Geographical pricing is a strategy where different prices are charged in different outlets, this strategy is made keeping in mind the purchasing power of the locality, if the local people can pay higher price for a product then the price is high there but same product may have a lower price in an area where people can not pay high price.

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Example 2: Price of a hair brush is $10 in a poor area while the same brush is available in a posh area at a rate of $35.

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