Bond Financing Alternatives You are working for Blower Corporation, which is considering issuing bonds so that it can purchase new production equipment. The company has talked with two financial institutions and is looking at two different debt proposals. Under the first alternative, the company would issue $500,000 par value, 15-year bonds with a 20 percent stated interest rate. The second alternative is to issue $800,000 par value, 10-year bonds with a stated interest rate of 10 percent. Both issues pay interest annually on December 31. The effective interest rate for Blower is 12 percent. Blower uses the effective-interest method in recording interest expense. The bonds will be issued on Janu- ary 1, 2002.

a. Compute the amount of cash that would be received under each alternative.

b. If Blower is interested in selecting the alternative that results in receiving the larger amount of cash when the bonds are issued, which alternative should be chosen?

c. Compute the amount to be recorded as interest expense for 2002 under each alternative.

d. If Blower is interested in selecting the alternative with the lower amount reported as interest expense in 2002, which alternative should be chosen? Explain.

e. If Blower is interested in selecting the alternative with the lower annual interest payment, which alternative should be chosen? Explain.