1. Effect of financing on EPS: (Amount in $) 2. Effect of financing on EPS
(Amount in $) 3. Advantages and disadvantages: When the company is earning good profits then, plan 3 is good for the shareholders. EPS is a more in the plan 3, when the EBIT is $10,000,000. But when the EBIT is 6,000,000, plan 3 generates only $0.44 and plan 2, generates $1.80. Keeping in mind the earnings capacity of the company, a proper financial plan should be implemented.
A bond is a long-term debt security. Bonds are issued with specific coupon or nominal rate, which is determined largely by market conditions at the time of the bond issuance. The amount of the interest payment can be calculated by multiplying the rate of interest (or coupon) by the face value.
Often, bonds are issued at interest rate which is equal to prevailing market rate. But, in few instances it differs. If the issued interest rate is higher than the market rate then it is a case of premium vice versa if they are issued at interest rate lower than the market rate it is a case of discount. Depending on the nature of issue say premium or discount, amount will be amortized through-out the life of the bond like an expense or income.
a. In the present case, the issued interest rate is more than the market interest rate then, the bonds are issued at premium. It means the cash received on issuance of bonds is more than the face value of the bonds payable.
Thus, the amount of cash received more than $ 26,000,000.
b. (1)Face value of the bonds is
(2)Market or effective rate of interest is
(3)Contract rate of interest is
(4)Maturity amount is
Entries for bonds payable transactions at premium
1. Working Notes
Present Value of bonds at effective (market) rate of interest of 10% 73,100,469
Face Value of bonds at 12%, 10 year bonds 65,000,000
2a. Working Notes:
2b. Working Notes:
4. Yes the bond proceeds will always be greater than the face amount of the bonds when the contract rate is greater than the market rate of interest.
PV of bond's interest payments
Note - Difference on account of rounding off