Chapter 11, E3B Choice A Present value of 40 periodic payments at 4% (from Table 2*): х Present value of a single payment at the end of 40 periods at 4% (from Table 1"): х Issue price (total present value) of Choice A Choice B Present value of 30 periodic payments at 4% (from Table 2*): х Present value of a single payment at the end of 30 periods at 4% (from Table 1*): х Issue price (total present value) of Choice B Issue price (total present value) of both bonds *From tho annondix o ont ualuo tahlor
Debenture Valuation
A debenture is a private and long-term debt instrument issued by financial, non-financial institutions, governments, or corporations. A debenture is classified as a type of bond, where the instrument carries a fixed rate of interest, commonly known as the ‘coupon rate.’ Debentures are documented in an indenture, clearly specifying the type of debenture, the rate and method of interest computation, and maturity date.
Note Valuation
It is the process to determine the value or worth of an asset, liability, debt of the company. It can be determined by many processes or techniques. Many factors can impact the valuation of an asset, liability, or the company, like:
E3B. Kirby, Inc., is considering the sale of two bond issues. Choice A is a $800,000
bond issue that pays semiannual interest of $64,000 and is due in 20 years. Choice B is
a $800,000 bond issue that pays semiannual interest of $60,000 and is due in 15 years.
Assume that the market interest rate for each bond is 8 percent. Calculate the amount
that Kirby will receive if both bond issues are made. (Hint: Calculate the present value
of each bond issue and sum.)
Choice A:
Periodic payment = $64,000
Maturity value after 20 years = $800,000
Present value annuity factor at 4% for 40 periods (since semiannual payments) = 19.792
Present value factor of $1 at 4% for after 40 periods = 0.208
| Particulars | Amount $ |
|
Present value of 40 periodic payments at 4% (64,000*19.792) |
1,266,688 |
|
Present value of single payment at the end of 40 periods at 4% (800,000*0.208) |
166,400 |
| Issue price of choice A | 1,433,088 |
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