Question

# Martinez Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested...

Martinez Inc. manufactures cycling equipment. Recently, the vice president of operations of the company has requested construction of a new plant to meet the increasing demand for the company’s bikes. After a careful evaluation of the request, the board of directors has decided to raise funds for the new plant by issuing \$3,054,300 of 12% term corporate bonds on March 1, 2017, due on March 1, 2032, with interest payable each March 1 and September 1, with the first interest payment on September 1st, 2017. At the time of issuance, the market interest rate for similar financial instruments is 8%. Click here to view factor tables As the controller of the company, determine the selling price of the bonds

Coupon Rate = 12%

Semi- annual Coupon rate = 6%

Semi-annual coupon = \$3,054,300 * 6% = \$183,258

Bond Issuance Price = Present Value of Bond at Market rate + Present Value of Annuity of Interest payment at Market rate

Market Rate of Interest = 8%

Semi-annual Market rate of Interest = 4%

Maturity = 15 years or 30 semi-annual period

Present value of Bond at Market Rate = \$3,054,300 * 0.3083

Present Value of Bond at Market Rate = \$941,640.69

Present Value of annuity of Interest Payment at Market Rate = \$183,258 * 17.2920

Present Value of Annuity of Interest payment at Market rate = \$3,168,897.34

Bond Issuance Price = \$941,640.69 + \$3,168,897.34

Bond Issuance Price = \$4,110,538.03

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