Tesla Corporation needs to raise funds to finance a plant expansion, and it has
ID: 2735351 • Letter: T
Question
Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent. Assume a par value of $1,000 and semiannual compounding.
a.)
What will these bonds sell for at issuance? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Issue Price:
b.)
Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
First Year:
Last year:
c.)
Using the straight-line method, what interest deduction can the company take on these bonds in the first year? In the last year?. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
First Year:
Last year:
Tesla Corporation needs to raise funds to finance a plant expansion, and it has decided to issue 25-year zero coupon bonds to raise the money. The required return on the bonds will be 9 percent. Assume a par value of $1,000 and semiannual compounding.
a.)
What will these bonds sell for at issuance? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)
Issue Price:
b.)
Using the IRS amortization rule, what interest deduction can the company take on these bonds in the first year? In the last year? (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
First Year:
Last year:
c.)
Using the straight-line method, what interest deduction can the company take on these bonds in the first year? In the last year?. (Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)
First Year:
Last year:
Explanation / Answer
The price of a zero Coupon bond is the PV of the par.
a.
P0=1000(1+.09/2)^-25×2
=1000(.11071)
=$110.71
b.
In one year ,the price of bond will be :
P1=1000(1+.045)^-48
=1000(.12090)
=$120.90
Year 1 intrest deduction=P1-P0
=120.91-110.71
=$10.19
Price of bond when it has one year to maturity
P24=1000(1.045)^-2
=1000(.91573)
=$915.73
Year 24 interest deduction=1000-915.73
=$84.27
c.
Total interest received by bond holder is:
Total interest=1000-110.71
=$889.29
Annual interest deduction=889.29/25
=$35.57
First year =$35.57
Last year=$35.57
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