Debt Retirement 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 10-year bonds carrying a coupon rate of 8% 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 6%.

Two years later, the market rate of interest on comparable debt instruments had climbed to 12%. 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 2 years assuming a market yield rate of 12%. Calculate the amount of the gain or (loss) that would result from early retirement of the debt.

Where will the cash flow from the retirement of the bonds be reported on the companys statement of cash flows?