(c) Larkspur Inc. loans money to John Kruk Corporation in the amount of $866,000
ID: 2544513 • Letter: #
Question
(c) Larkspur Inc. loans money to John Kruk Corporation in the amount of $866,000. Larkspur accepts an 8% note due in 7 years with interest payable semiannually. After 2 years (and receipt of interest for 2 years), Larkspur needs money and therefore sells the note to Chicago National Bank, which demands interest on the note of 10% compounded semiannually, what is the amount Larkspur will receive on the sale of the note? (Round factor values to 5 decimal places, e.g. 1.25124 and final answer to 0 decimal places, e.g. 458,581.) Amount received on sale of noteExplanation / Answer
The yearly interest stream = 866000*0.08= 69280$
After receiving 2 interest streams the remaining 5 streams to be received by the Chicago national bank so that is a income for them and the value of the note payable at 7th year is the terminal value.
The present value of all these cashflows discounted at (1.05)^2-1= 10.25% is the amount which would be received on sale of note:
69280)/(1.1025)^1+ ....69280/(1.1025)^5+ 866000/(1.1025)^5= 803656.29$
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