Question

Financing Options OPTION1 The company could issue $2,500,000 of long-term bonds, due in 8 years with a stated rate of interest, paid semiannually, of 4%. The market rate for similar debt is 6%. The bond issues for 85. OPTION 2 The company could issue $2,000,000 of long-term bonds, due in 7 years with a stated rate of interest, paid semiannually, of 6%. The market rate for similar debt is 4%. The bond issues for 110. OPTION 3 The company could issue 300,000 additional shares of $1 par value common stock for $7.50 per share The company will begin paying a dividend to ALL the common shareholders of $0.20 per share and this will continue into the future.

Balance sheet

Answer 1

option 1
Cash received	2,125,000
Interest Paid
Term	Interest	PV @3% per term
1	100000	97,087			yearly expense
2	100000	94,260			Interest	200000
3	100000	91,514			Discount on issue	46875
4	100000	88,849				246875
5	100000	86,261
6	100000	83,748
7	100000	81,309
8	100000	78,941
9	100000	76,642
10	100000	74,409
11	100000	72,242
12	100000	70,138
13	100000	68,095
14	100000	66,112
15	100000	64,186
16	100000	62,317
Repayment	2500000	1,557,917
		2,814,028
Npv	(689,028)
Option 2
Cash received	2,200,000
Term	Interest	PV @4% per term
1	120000	115384.6154			yearly expense
2	120000	110946.7456			Interest	240000
3	120000	106679.563			Premium on issue	-28571.4
4	120000	102576.5029				211428.6
5	120000	98631.25281
6	120000	94837.74309
7	120000	91190.13758
8	120000	87682.8246
9	120000	84310.40827
10	120000	81067.70026
11	120000	77949.71179
12	120000	74951.64595
13	120000	72068.89034
14	120000	69297.00994
Repayment	2000000	$        1,154,950
		$        2,422,525
Npv	(222,525)
Option 3					yearly expense
Cash received	2250000				Dividend	60000
Dividend paid yearly	60000