Bond Financing Alternatives You are working for Short Company, which is expanding rapidly and anticipates having cash flow shortages for the next several years.

You are considering using one of three alternative debt proposals for financing the company’s expansion: (1) issue bonds with a $1,000,000 par value and a 6 percent stated rate, paying interest annually, due in 20 years; (2) issue bonds with a par value of $800,000 and a stated rate of 8 percent, paying interest annually, due in 10 years; and (3) issue bonds with a par value of $2,800,000 and a zero stated rate, due in 15 years. The company’s general cost of borrowing on a long-term basis is estimated at 10 percent.

a. Calculate the issue price of each of the bonds. Which of the alternatives will result in the largest amount of cash proceeds?

b. If the company decides to issue the bond that generates the most cash at the time of issuance, show how the bond would be reported in Short’s balance sheet immediately after issuance.

c. Compute the interest expense that Short would report for the first and second years on the three different bond issues if it uses the straight-line method of amortizing bond discount.

d. What factors other than the amount of cash to be received at the time of issuance should Short Company consider in deciding which of the three bonds to issue?