Smart Egg, Corp. seeks to raise a quantity of capital to expand its business int
ID: 2458716 • Letter: S
Question
Smart Egg, Corp. seeks to raise a quantity of capital to expand its business internationally. After consulting with their investment bankers, Smart Egg decides that raising money through bonds would be most beneficial to their corporate capital structure. At the beginning of the year, Smart Egg, Corp. issued face value SI,000,000 of bonds, maturing in 3 years, with a coupon rate of 10%, paid semi-annually. Investors require at least 6% return to invest in Smart Egg, Corp.'s bonds. The following information from the Time Value of Money tables are provided. The selling price of the bond on issue date. Whether the bond will sell at Premium, Discount, or Par. The amount of any Discount or Premium. Otherwise indicate that this is a Par bond.Explanation / Answer
Answer to part 1:
Calculation of Selling Price of Bond on issue date:
Given data,
Face value of bonds = $1000000
Coupon rate =10% paid semi annually
Maturity period = 3 years
Number of periods = 6
Coupon rate per period = 10/2 = 5%
Interest = $1000000 * 5% = $50000
Maturity value = $1000000
Yield per annum = 6%
Yield per period = 6/2 = 3%
Selling Price = PV of future cashflows
= [PVAF (3%, 6periods) * Interest] + [PVF (3%, 6periods) * Maturity value]
= (5.4172 * $50000) + (0.8375 * $1000000)
= $270860 + $837500
= $1108360
Answer to Part 2:
Face Value = $1000000
Selling Price = $1108360
Since Selling price > Face Value, we can say the the bond is selling at premium
Answer to Part 3:
Amount of Premium
= Selling Price - Face Value
= $1108360 - $1000000
= $108360
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