Question

Hopkins Company is planning to issue $460,000 of 5%, 15-year bonds payable to borrow for a major expansion. The owner, John Hopkins, asks your advice on some related matters Read the requirements * Requirements - XL value Junt price 1. Answer the following questions: a. At what type of bond price will Hopkins Company have total interest expense equal to the cash interest payments? b. Under which type of bond price will Hopkins Company's total interest expense be greater than the cash interest payments? c. If the market interest rate is 7%, what type of bond price can Hopkins Company expect for the bonds? 2. Compute the price of the bonds if the bonds are issued at 93 3. How much will Hopkins Company pay in interest each year? How much will Hopkins Company's interest expense be for the first year? (Assume the straight-line method is used.) Junt price terest expense be for the first year? (For this used.) Print Done (Round your answers to the nearest whole dollar) Assuming that the straight-line method is used, Hopkins Company's interest expense will be $ for the first year,

Answer 1

Answer 1-a:

Total interest expense will be equal to the cash interest payments if the bonds are issued at par.

Answer 1-b:

Total interest expense will be greater than the cash interest payments if the bonds are issued at discount.

Answer 1-c:

If the market interest rate (7%) is higher than the coupon rate (5%), then the bonds will be issued at less than discount.

Answer 2.

Face Value = $460,000

Issue Value = 93% * Face Value
Issue Value = 93% * $460,000
Issue Value = $427,800

The price of the $460,000 bonds issued at 93 is $427,800

Answer 3.

Annual Coupon Rate = 5%
Annual Coupon = 5% * $460,000
Annual Coupon = $23,000

If the $460,000 bonds are issued at 93, Hopkins Company will pay $23,000 in interest each year.

Discount on Issue = Face Value - Issue Value
Discount on Issue = $460,000 - $427,800
Discount on Issue = $32,200

Time to Maturity = 15 years

Annual Amortization of Discount = Discount on Issue / Time to Maturity
Annual Amortization of Discount = $32,200 / 15
Annual Amortization of Discount = $2,147

Annual Interest Expense = Annual Coupon + Annual Amortization of Discount
Annual Interest Expense = $23,000 + $2,147
Annual Interest Expense = $25,147

Assuming that the straight-line method is used, Hopkins Company’s interest expense will be $25,147 for the first year.