a$)$ Calculate the present value of the bond if J&J$\text{'}$s were to use a $3\%$ coupon rate.

$[$

$]$

Bond Value

Number of periods $$

Present Value Factor

Present Value of the Face Value of the Bond $$

Actual Interest payment

Interest Value

Present Value Factor

Present value of the Interest Payments

Present Value of the Bond

b$)$ Record the entry for the issue, first interest payment at June $1$st$,$ accrual of interest at

December $31$st and the second interest payment for $($a$)$ on January $1st.$PART C: Debt vs$.$ Equity

J&J$\text{'}$s is thinking of expanding their store. They have determined that they will need approximately $$5$ million to

finance the expansion. Currently they are exploring to options:

i$)$ Issue Equity for the $$5$ million $-$ This would involve issuing another $1$ million shares at a price of $$5$ per share.

ii$)$ Secure debt for the $$5$ million $-$ The approximate interest rate would be $3\%.$

Before any expansion, J&J$\text{'}$s has $$20$ million in shareholders' equity made up of $15$ million shares. J&J$\text{'}$s will pay a

tax rate of $35\%$ and their profit before interest and income taxes is estimated to be $$1$ million for the year.

Instructions:

a$)$ Calculate the earnings per share $($Profit $/$# of Shares$)$ and the return on equity if the company were to

pursue the issue of the equity to finance their expansion.

b$)$ Calculate the earnings per share and the return on equity if the company were to pursue the issue of debt to

finance the expansion

c$)$ Which results in the higher rate of return for shareholders? How do you know?

d$)$ Which option is riskier? Why?

PART D: Bonds Payable

J&J$\text{'}$s has decided to issue debt in order to finance their expansion. They will be issuing $$5$ million worth of $10-$year

bonds in the open market on January $1^{st},2025.$ Interest is payable semi$-$annually. The current market rate expected

on bonds of a similar risk level would be $5\%.$ J&J$\text{'}$s is trying to decide what coupon rate they should attach to the

bond.

Instructions:

a$)$ Calculate the present value of the bond if $JJ\text{'}$s were to use a $3\%$ coupon rate.

b$)$ Record the entry for the issue, first interest payment on July $1$st$,$ accrual of interest at December ${31}^{st}$ and the

second interest payment for $($a$)$ on January $1$st$.$

c$)$ Calculate the present value of the bond if $J$& J$\text{'}$s were to use a $9\%$ coupon rate.

d$)$ Record the entry for the issue, first interest payment on July $1$st$,$ accrual of interest at December ${31}^{st}$ and the

second interest payment for $($b$)$ on January $1$st$.$

e$)$ The owner of J&J$\text{'}$s wants to issue at a premium because he sees that he will get more money today. What

is the mistake in his thinking?