2. Bond Question: 1. The Rio Tinto Corporation is planning a capital project that would involveconstruction of an offshore oil drilling facility off the coast of Brazil. The cost of the project isestimated at $1.6 billion. The company is currently considering two alternative financing arrangementsto fund the project.Financing Alternative A:It can issue a new bond and use the proceeds to fund the project. The bonds will carry an annual couponrate of 5.0%, payable semiannually, and have a maturity period of five (5) years with a face value of$1,671,271,300. The effective market rate of the bonds is 6%. The asset will be depreciated over 10years with no residual value using the straight-line method of depreciation.Financing Alternative B:It can lease an identical oil platform from a Korean company in a financing arrangement that wouldrequire Rio Tinto Corporation to pay $ 307,314,075 at the end of each year for seven (7) years. Theappropriate implied interest rate for the lease arrangement is 8%. Rio Tinto Corporation will retainownership of the oil platform at the end of the lease and operate it for an additional three years beforedismantling it. The leases asset will therefore be depreciated over 10 years with no residual value usingthe straight-line method of depreciation.Required:a.i. Determine the book value of the bond liability associated with Financing Alternative A at thebeginning of year 1. Round answer to the nearest thousand.ii.Determine the bond interest expense for year 1 in Financing Alternative A. Round your answers tothe nearest thousand.What is the amount of the bond liability at the end of the first year in Financing Alternative A?111.

The bonds generally sell at a discount when the coupon rate offered by the bond is lower than the…

Answered: 2. Bond Question: 1. The Rio Tinto…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter19: Lease And Intermediate-term Financing

Section: Chapter Questions

Problem 7P

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