Baiman, Inc. issues $400,000 of zero-coupon bonds that mature in 10 years. Compute the bond issue price assuming that the bonds' market rate is:

a. 8% per year compounded semiannually. (Use a calculator or Excel for your calculations. Round your answers to the nearest dollar.)

b. 10% per year compounded semiannually. (Use a calculator or Excel for your calculations. Round your answers to the nearest dollar.)

If prior to the debt issue at 10%, the firm had total assets of $3.5 million and total equity of $1 million, what would be the effect of the new borrowing on the financial leverage of the firm? Financial leverage prior to borrowing:

Financial leverage subsequent to borrowing :

Increase (Decrease) in financial leverage: