Question

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You are the financial planner for Johnson Controls. Assume last year's profits were $720,000. The board of directors decided to forgo dividends to stockholders and retire high-interest outstanding bonds that were issued 6 years ago at a face value of $1,340,000. 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 10 years. Bank A pays 6% compounded quarterly, and Bank B pays 7% compounded annually.(use Table 1 and Table 2 provided.) (Do not round intermediate calculations. Round your answers to the nearest dollar amount.) a-1. Which bank would you recommend? O Banka Bank B a-2. How much of the company's profit should be placed in the bank? Profit b. If you recommended that the remaining money not be distributed to stockholders but be placed in Bank B, how much would the remaining money be worth in 10 years? Future Value $

table 1table 2

Answer 1

The answer has been presented in the supporting sheet. For detailed answer refer to the supporting sheet.

Answer Part 1) Annual effective rate of interest of Bank A = (1+6%/4)) 14-1 = 1.061364-1 = 6.1364% Annual rate of Bank B = 7% Sice the annual rate of interest of Bank B is higher, so it is better to invest in Bank B The correct answer is Bank B 5 Part 2) 5 Amount to be placed = amount required for retirement * Present value factor (7%,10) = 1340000*.5083 B = $ 681122 Thus the correct answer is $ 681122

А E e Part 3) Remaining amount invested in bank account = total earning - amount to be placed for bonds = 720000 - 681122 = $ 38878 Future value = remainig amount * future value factor (7%,10) 7 = 38878*1.9672 = $ 76481 Thus the correct answer is $ 76481