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Ellis Company is planning to issue $450,000 of 5%, 15-year bonds payable to borrow for a major expansion. The owner, Simon Ellis, asks your
Ellis Company is planning to issue $450,000 of 5%, 15-year bonds payable to borrow for a major expansion. The owner, Simon Ellis, asks your advice on some related matters. Read the requirements. Requirement 1. Answer the following questions. At what type of bond price will Ellis Company have total interest expense equal to the cash interest a. payments? Face value Under which type of bond price will Ellis Company's total interest expense be greater than the cash b. interest payments? Discount price c. If the market interest rate is 8%, what type of bond price can Ellis Company expect for the bonds? Requirement 2. Compute the price of the bonds if the bonds are issued at 87. Discount price The price of the $450,000 bond issued at 87 is $ 391,500 Requirement 3. How much will Ellis Company pay in interest each year? How much will Ellis Company's interest expense be for the first year? (For this scenario we are assuming that the $450,000 bonds are issued at 87. Further assume that the straight-line method is used.) If the $450,000 bonds are issued at 87, Ellis Company will pay this amount of interest each year (Round your answers to the nearest whole dollar.) Assuming that the straight-line method is used, Ellis Company's interest expense for the first year will be $ 22,500 Requirements 1. Answer the following questions: a. At what type of bond price will Ellis Company have total interest expense equal to the cash interest payments? b. Under which type of bond price will Ellis Company's total interest expense be greater than the cash interest payments? C. If the market interest rate is 8%, what type of bond price can Ellis Company expect for the bonds? 2. Compute the price of the bonds if the bonds are issued at 87. 3. How much will Ellis Company pay in interest each year? How much will Ellis Company's interest expense be for the first year? (Assume the straight-line method is used.) Print Done - X
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