MTF Inc. is a manufacturer of electronic components for facsimile equipment. The company financed the expansion of its production facilities by issuing \($100\) million of ten-year bonds carrying a coupon rate of eight percent with interest payable annually on December 31. The bonds had been issued on January 1.

At the time of the issuance, the market rate of interest on similar risk-rated instruments was six percent.Two years later, the market rate of interest on comparable debt instruments had climbed to twelve percent.The CEO of MTF realized that this might be an opportune time to repurchase the bonds, particularly because an unexpected surplus of cash made the outstanding debt no longer necessary.

Required

1. Calculate the proceeds received by the company when the debt was initially sold.

2. Calculate the interest expense for each of the two years that the bonds were outstanding.

3. Calculate the amount of cash needed to retire the debt after two years assuming a market yield rate of twelve percent. Does the retirement result in a gain or loss? If so, where will the gain/loss be reported on the company’s statement of cash flow?