1. Common Products has issued its $.002 par value stock in two separate financin
ID: 2640573 • Letter: 1
Question
1. Common Products has issued its $.002 par value stock in two separate financing transactions. Transaction 1: ten years ago, the founder of the company purchased 10,000,000 shares of stock for $250,000. Transaction 2: last year the company went public by issuing 15,000,000 shares of stock to the public for $21 million. Use this information to fill in the following table:
Common shares (par value) ____________________
Additional paid-in capital ____________________
Retained Earnings ____________________
Net Equity $30,000,000
2. A $1,000 face value bond of Acme Inc. pays an annual coupon and carries a coupon rate of 5.75%. It is was a 30 year bond when issued and it has 12 years remaining to maturity. If it currently has a yield to maturity of 6.25%.
(a) What interest payments do bondholders receive each year?
(b) What is the current bond price?
(c) What is the bond price if the yield to maturity rises to 7.25%?
3. A 30 year maturity bond with a coupon rate of 7.25% and face value of $1,000 makes semi-annual coupon payments. What is the bond
Explanation / Answer
1. Common Products has issued its $.002 par value stock in two separate financing transactions. Transaction 1: ten years ago, the founder of the company purchased 10,000,000 shares of stock for $250,000. Transaction 2: last year the company went public by issuing 15,000,000 shares of stock to the public for $21 million. Use this information to fill in the following table:
Common shares (par value) _=(10000000+15000000)*0.002= 50000
Additional paid-in capital =21000000+250000-50000=21,200,000
Retained Earnings =8,750,000
Net Equity $30,000,000
2. A $1,000 face value bond of Acme Inc. pays an annual coupon and carries a coupon rate of 5.75%. It is was a 30 year bond when issued and it has 12 years remaining to maturity. If it currently has a yield to maturity of 6.25%.
(a) What interest payments do bondholders receive each year?
interest payments do bondholders receive each year = 5.75%*1000= $57.5
(b) What is the current bond price?
current bond price = 57.5*(1-1/(1+6.25%)^12)/6.25% + 1000/(1+6.25%)^12= 958.65
(c) What is the bond price if the yield to maturity rises to 7.25%?
bond price if the yield to maturity rises to 7.25% = 57.5*(1-1/(1+7.25%)^12)/7.25% + 1000/(1+7.25%)^12=$ 882.43
3. A 30 year maturity bond with a coupon rate of 7.25% and face value of $1,000 makes semi-annual coupon payments. What is the bond
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