You are the financial planner for Johnson Controls. Assume last year’s profits w

ID: 2556788 • Letter: Y

Question

You are the financial planner for Johnson Controls. Assume last year’s profits were $750,000. The board of directors decided to forgo dividends to stockholders and retire high-interest outstanding bonds that were issued 4 years ago at a face value of $1,440,000. You have been asked to invest the profits in a bank. The board must know how much money you will need from the profits earned to retire the bonds in 8 years. Bank A pays 8% compounded quarterly, and Bank B pays 9% compounded annually.(use Table 1 and Table 2 provided.) (Do not round intermediate calculations. Round your answers to the nearest dollar amount.)

Explanation / Answer

Future value of investment at 2% for 32 quarter

FV = PV*(1+r)^n r =8/4 =2% n = 8*4 =32

750000*(1.02)^32

1413405

This investment would provide additional income of 1413405-750000 = 663405.Investment in bank with 8% interest would provide 1413405 which is not sufficient to pay off the debt and this investment would need extra amount of 1413405-1440000=26595

Future value of investment at 9% for 8 Years

FV = PV*(1+r)^n

750000*(1.09)^8

1494422

Investment in bank with 9% interest would provide 1494422 which is sufficient to pay off the debt and this investment would provide 1494422-750000 =744422