A company had the following events related to $5 m
A company had the following events related to $5 million of 10-year bonds with a coupon rate of 8% payable semi-annually on 30 June and 31 December:
Issued on 1 January 2005, when the market rate of interest was 6%.
Bought back in an open market transaction on 1 January 2011, when the market rate of interest rate was 8%.
Which of the following statements best describes the effect of the bond repurchase on the financial statements for 2011? If the company uses the indirect method of calculating the cash from operations, there will be a:
A.$346,511 gain on the income statement.
B.$743,873 gain on the income statement.
C.$350,984 decrease in the cash from operations.
参考解答
401***991
2024-10-27 10:32:48
Ans:C.
The book value of the bonds on 1 January 2011 is equal to the present value of the remaining coupon payments and principal discounted at the market rate at time of issue (3% per period).
Coupon = 0.08 x0.5x5,000,000=200,000; there are 4 years remaining or 8 coupon payments
Book value
= 200,000 PVAnnuity (n=8, i=3%)+5,000,000PV(n=8, i=3%)
=1,403,938+3,947,046
=5,350,984
Using a financial calculator: PMT = 200,000; FV=5,000,000; I=3%; N=8;
Compute PV = 5,350,984,
Because the market interest rate when the bonds are brought back (8%) is equal to the coupon rate, the company can buy back the bonds at par, $5,000,000
Cost of repurchase $5,000,000
Book value 5,350,984
Gain on retirement 350,984
On the cash flow statement the gain would be deducted from net income in calculating the cash from operations under the indirect method, and the cash paid to repurchase the bonds would be a cash outflow in the financing section.
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