Present Value of an Annuity

1) On January 1, 2016, you win $2,600,000 in the state lottery. The $2,600,000 prize will be paid in equal installments of $260,000 over 10 years. The payments will be made on December 31 of each year, beginning on December 31, 2016. If the current interest rate is 5%, determine the present value of your winnings. Use Table 2. Round to the nearest whole dollar. $

2) Compute Bond Proceeds, Amortizing Premium by Interest Method, and Interest Expense

Evans Co. produces and sells motorcycle parts. On the first day of its fiscal year, Evans Co. issued $20,000,000 of four-year, 14% bonds at a market (effective) interest rate of 12%, with interest payable semiannually. Compute the following:

a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibit 4 and Exhibit 5. Round to the nearest dollar. $

b. The amount of premium to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar. $

c. The amount of premium to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar. $

d. The amount of the bond interest expense for the first year. Round to the nearest dollar.

3) Compute Bond Proceeds, Amortizing Discount by Interest Method, and Interest Expense

Lewis Co. produces and sells aviation equipment. On the first day of its fiscal year, Lewis Co. issued $40,000,000 of five-year, 10% bonds at a market (effective) interest rate of 12%, with interest payable semiannually. Compute the following:

a. The amount of cash proceeds from the sale of the bonds. Use the tables of present values in Exhibit 4 and Exhibit 5. Round to the nearest dollar. $

b. The amount of discount to be amortized for the first semiannual interest payment period, using the interest method. Round to the nearest dollar. $

c. The amount of discount to be amortized for the second semiannual interest payment period, using the interest method. Round to the nearest dollar. $

d. The amount of the bond interest expense for the first year. Round to the nearest dollar. $

4) Effect of Financing on Earnings Per Share

Three different plans for financing a $4,200,000 corporation are under consideration by its organizers. Under each of the following plans, the securities will be issued at their par or face amount, and the income tax rate is estimated at 40% of income.

		Plan 1		Plan 2		Plan 3
10% bonds		_		_		$2,100,000
Preferred 10% stock, $40 par		_		$2,100,000		1,050,000
Common stock, $4.2 par		$4,200,000		2,100,000		1,050,000
	Total	$ 4,200,000		$ 4,200,000		$ 4,200,000

Required:

1. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $8,400,000. Enter answers in dollars and cents, rounding to the nearest cent.

	Earnings Per Share on Common Stock
Plan 1	$
Plan 2	$
Plan 3	$

2. Determine for each plan the earnings per share of common stock, assuming that the income before bond interest and income tax is $3,990,000. Enter answers in dollars and cents, rounding to the nearest cent.

	Earnings Per Share on Common Stock
Plan 1	$
Plan 2	$
Plan 3	$

3. The principal of Plan 1 is that it involves only the issuance of common stock, which does not require a periodic interest payment or return of principal, and a payment of preferred dividends required.