Chapter 12: Q9RQ (page 654)
Why would a company choose to issue bonds instead of issuing stock?
The common stock is a type of stock in which the company transfers some part of ownership to the stockholder.
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Determining the present value of bond at issuance
On December 31, 2018, when the market interest rate is 12%, Benson Realty issues
$600,000 of 9.25%, 10-year bonds payable. The bonds pay interest semi annually.
Determine the present value of the bonds at issuance.
Determine whether the following bonds payable will be issued at face value, at a premium, or at a discount:
3. A 10% bonds payable is issued when the market interest rate is 8%.
4. A 10% bonds payable is issued when the market interest rate is 10%.
5. A 10% bonds payable is issued when the market interest rate is 12%.
Explain each of the key factors that the time value of money depends on.
What is a mortgage payable?
Analyzing alternative plans to raise money
SB Electronics is considering two plans for raising \(4,000,000 to expand operations.
Plan A is to issue 9% bonds payable, and plan B is to issue 500,000 shares of common
stock. Before any new financing, SB Electronics has net income of \)350,000 and
300,000 shares of common stock outstanding. Management believes the company can
use the new funds to earn additional income of $700,000 before interest and taxes.
The income tax rate is 30%. Analyze the SB Electronics situation to determine which
plan will result in higher earnings per share. Use Exhibit 12-6 as a guide.
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