On August 1, the Stockton Corporation issued $40,000,000, 9%, 8-year bonds and r

Question

On August 1, the Stockton Corporation issued $40,000,000, 9%, 8-year bonds and received $40,000,000. Interest on the bonds is to be paid every six months beginning on February 1. Calculate the Corporation's monthly cost of borrowing by issuing the bonds. a. $416,667 b. $2,400,000 c. $300,000 d. $3,600,000 On August 1, the Stockton Corporation issued $40,000,000, 9%, 8-year bonds and received $40,000,000. Interest on the bonds is to be paid every six months beginning on February 1. Calculate the Corporation's monthly cost of borrowing by issuing the bonds. a. $416,667 b. $2,400,000 c. $300,000 d. $3,600,000 On August 1, the Stockton Corporation issued $40,000,000, 9%, 8-year bonds and received $40,000,000. Interest on the bonds is to be paid every six months beginning on February 1. Calculate the Corporation's monthly cost of borrowing by issuing the bonds. a. $416,667 b. $2,400,000 c. $300,000 d. $3,600,000

Explanation / Answer

Cash receipts

$ 40,000,000

Cash payments

      Bond principal

$ 40,000,000

      Bond interest ( $ 40,000,000 x 0.09 x 8)

$ 28,800,000

Total cash payment

$ 68,800,000

8-year cost of borrowing

$ 28,800,000

Monthly cost of borrowing ($ 28,800,000/(12 x 8)

$ 300,000

Hence option “c. $ 300,000” is correct answer.

Cash receipts

$ 40,000,000

Cash payments

      Bond principal

$ 40,000,000

      Bond interest ( $ 40,000,000 x 0.09 x 8)

$ 28,800,000

Total cash payment

$ 68,800,000

8-year cost of borrowing

$ 28,800,000

Monthly cost of borrowing ($ 28,800,000/(12 x 8)

$ 300,000

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