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This assignment is due at the beginning of class on Monday, 2 0 November 2 0 2 3 , please bring a hard copy to

This assignment is due at the beginning of class on Monday, 20 November 2023, please bring a hard
copy to class. Please use the templates provided. Assume the firms in all the problems use the effective
interest rate method of amortization.
Assume that on January 1, a firm issues 10-years bonds with a par value of $300,000, and a 10%
coupon rate. At the time of issue, the market rate of interest on bonds of similar risk and maturity was
8%. Interest is payable annually on December 31 each year.
a. Prepare an amortization table for the bonds (show just the first three years.)
b. Suppose immediately after making the interest payment at the end of year 3, the firm decides to
repurchase the bonds in the open market. At that time, the market rates of interest are 5%. What
will the firm have to pay (market value) to repurchase the bonds? Will the firm report a gain, a
loss, or neither on the repurchase of the bonds? How much is the gain or loss on the repurchase
transaction that the firm would report in its financial statements?
There are two firms, A and B. Each firm has bonds outstanding with a par value of $20,000 and 4
years to maturity as of the end of F'14. Firm A's bonds pay annual coupons of 10%. Firm B's
bonds pay annual coupons of 5%. Assume:
For the year 2015 all sales, inventory purchases from suppliers, operating expenses and taxes are
made in cash.
All the net income is paid out as dividends for each firm.
The tax rate is 30%.
Complete the FY15 income statement, the FY15 direct statement of cash flows and the EOY' 15
balance sheet below for each firm. Note that you'll have to compute the YTM on the bonds for each
company in order to find the interest expense. Similar to what we did in class, prepare the first year of
the amortization table, and use it to find what goes in interest expense (income statement) and the
ending carrying value of the bonds (balance sheet value as at EOY'15). Note that the bonds payable
on the balance sheet at EOY'14 would be the beginning carrying value (present value when
calculating YTM).
FIRM A
EOY'14
Cash =6,325
Accounts Receivable =5,000
Inventory =15,000
- Current Assets =26,325
Net PPE =50,000
Total Assets =76,325
Accounts Payable =5,000
Bonds Payable =21,325
Equity =50,000
Total LIab. & Equity =76,325
EOY'15
Cash =?
Accounts Receivable =5,000
Inventory =15,000
Current Assets =?
Net PPE =45,000
Total Assets =?
Accounts Payable =5,000
Bonds Payable =?
Equity =50,000
Total LIab. & Equity =?
FY15
Sales =100,000
COGS =70,000
Gross Profit =30,000
Operating Expenses =10,000
Depreciation =5,000
EBIT =15,000
Interest Expense =?
EBT =?
Taxes =?
Net Income =?
Dividends =?
Cash collected from sales =?
Cash paid for inventory purchase =?
Cash paid for operating expenses =?
Cash paid for interest =?
Cash Flow from Operating Act. =?
Issuance of Long-Term Debt =0
Dividends Paid =?
Cash Flow from Financing Act. =?
Cash Flow from Investing Act. =0
Net Change in Cash =?
FIRM B
EOY'14
Cash =6,325
Accounts Receivable =5,000
Inventory =15,000
Current Assets =26,325
Net PPE =50,000
Total Assets =76,325
Accounts Payable =8,312
Bonds Payable =18,013
Equity =50,000
Total LIab. & Equity =76,325
EOY'15
Cash =?
Accounts Receivable =5,000
Inventory =15,000
Current Assets =?
Net PPE =45,000
Total Assets =?
Accounts Payable =8,312
Bonds Payable =?
Equity =50,000
Total LIab. & Equity =?
FY15
Sales =100,000
COGS =70,000
Gross Profit =30,000
Operating Expenses =10,000
Depreciation =5,000
EBIT =15,000
Interest Expense =?
EBT =?
Taxes =?
Net Income =?
Dividends =?
Cash collected from sales =?
Cash paid for inventory purchase =?
Cash paid for operating expenses =?
Cash paid for interest =?
Cash Flow from Operating Act. =?
Issuance of Long-Term Debt =0
Dividends Paid =?
Cash Flow from Financing Act. =?
Cash Flow from Investing Act. =0
Net Change in Cash =?

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