Question

Calculating the Fair Value of Debt.

The Longo Corporation issued $60 million maturity value in notes, carrying a coupon rate of six percent, with interest paid semiannually. At the time of the note issue, equivalent risk-rated debt instruments carried yield rates of eight percent. The notes matured in five years.Calculate the proceeds that Longo Corporation will receive from the sale of the notes. How will the notes be disclosed on Longo’s balance sheet immediately following the sale? Calculate the interest expense for Longo Corporation for the first year that the notes are outstanding. Calculate the balance sheet value of the notes at the end of the first year.

Answer 1

Issue Price

Issue Price = Pv of all coupon amount + PV of Maturity vaue

= 1.8*x8.110896^# + 60*0.675564^##

= 14.60 + 40.533 = 53.13 million

*60million*6%/2 = 1.8 million per semi annually

# PV anuity factor of 4 % for 10 period (8/2 = 4)

## interest factor of 4 % for 10th period

2. 6 % Notes Payable = 60 million (under long term liabilities)

3. Interest expenses for the first year = 4.263 million

Carrying value at year end = 53.7934 million

Working

Date	Cash Payment	Interest Exp	Carrying Value
01-Jan			53.13
01-Jul	1.8	2.1252*	53.4552
31-Dec	1.8	2.138208**	53.793408
		4.263408

*(53.13*.04)

(53.4552*.04)