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Fiesta28 [93]
3 years ago
8

Shanken corp. issued a 30-year, 5.9 percent semiannual bond 6 years ago. the bond currently sells for 108 percent of its face va

lue. the company's tax rate is 35 percent.
a. what is the pretax cost of debt
Business
1 answer:
bazaltina [42]3 years ago
6 0

The pre-tax cost of debt is yield to maturity of the debt.

The yield to maturity of debt is calculated as -

Yield to maturity = ]Coupon payment + ( Face value - Current price) / Number of years)] / [ ( Face value + Current price) / 2]

Here,

Coupon payment = $ 29.50 (semi-annual, thus 5.9% / 2 * 1000)

Face value = $ 1,000

Price = $ 1,000 * 108% = $ 1,080

Number of years = 12 ( semi-annual, thus 6 years * 2)

Pre-tax cost of debt = [ 29.50 + (1,000 - 1080/12)] / [ (1000+1080)/2 ]

Pre-tax cost of debt = 2.196 %

Annual pre-tax cost of debt = = 2.20 % * 2 = 4.40%

After tax cost of debt = ( 1 - tax rate ) * Annual pre-tax cost of debt

After tax cost of debt = ( 1 - 35%) * 4.40 %

After tax cost of debt = 2.86 %

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Answer:

Lindsey Hunter Corporation:

a) Journal entry to record item 1:

Debit Cash Account with $225,000

Credit Common Stock with 25,000

Credit APIC Account with $200,000

To record the issue of 5,000 shares of $5 par value at $45 per share

b) Journal entry to record item 2:

Debit Land Account with $50,000

Credit Common Stock with $5,000

Credit APIC Account with $45,000

To record the issue of 1,000 shares $5 par value at $50 per share.

c) Journal entry to record item 3:

Debit Treasury Stock with $21,500

Credit Cash with $21,500

To record the purchase of 500 treasury shares at $43 per share, using the cost method.

Explanation:

a) The costs related to the issuance of the stock totaling $7,000 had been deducted before arriving at $45 issue price.  These costs include attorney, accountants, and underwriting fees.  Companies have two options to treat these costs.  One is to treat them as organization costs and expense them accordingly or apply the costs to reduce the paid-in capital.  The later is the method elected by Lindsey Hunter and it is alright.

b) Company stock can be issued for cash or other assets, as in question 2.  The treatment is similar.  This time, Land is increased instead of cash.  The most important issue is the price at which the land is appraised and not the market value of the stock.  The difference between par value and issue value is credited or debited to the APIC account.

c) The APIC account represents "Additional Paid-in Capital" also described as Share Premium Account.  It is the excess of the issue value over the par value.

d) Treasury stock is company stock that was formerly outstanding and now bought back from stockholders.  It is a reduction of the Equity.  It is created as a contra account.  There are two methods of treating treasury stock.

One method accounts for treasury stock at cost while the second method accounts for it at par.  The difference is that when it is accounted for at cost, the repurchase value is debited to the Treasury account while the credit entry goes to the Cash account.

On the other hand, when it is accounted for at par, the par value is debited to the Treasury account while the difference between par and repurchase value is debited or credited to the APIC account.  The credit entry goes to the Cash account, as always.

8 0
3 years ago
Read 2 more answers
3. A trader has a short position of 10 contracts in a crude oil futures contract. Yesterday’s closing price was $55.30/barrel. T
forsale [732]

Answer:

The trader has incurred a loss because the price of crude oil futures has increased.

Loss = (Today's closing price - Yesterday's closing price) * 10 * 100

Loss = (57 - 55.30) * 100 Per contract

Loss = $170 per contract

Loss for 10 contracts = 170 * 10 = $1,700

Now the account balance = Current margin balance - Loss for 10 contracts

The account balance = 28,000 - 1,700

The account balance = $26,300

Maintenance margin for 10 contracts = 2,500 * 10 = $25,000

Since the account balance is greater than the required maintenance margin for 10 contracts, the investor is not required to deposit money into the margin account.

Explanation:

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3 years ago
Parker owned all of Odom Inc. Although the Investment in Odom Inc. account had a balance of $834,000, the subsidiary's 12,000 sh
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Answer:

$128,400

Explanation:

Account balance $ 834,000,

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$ 705,600 – $ 834,000 Investment Account Balance = $128,400

Therefore Reduction in Investment Account is $128,400

The Transaction affect the Investment in Odom inc account because their is reduction in the investment Account from $834,000 to $128,400

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Answer:

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