1. Common Products has issued its $.0001 par value stock in three separate finan

Question

1. Common Products has issued its $.0001 par value stock in three separate financing transactions. First, ten years ago, the founder of the company purchased 1,000,000 shares of stock for $50,000.Second, five years ago, the company sold 500,000 shares to a venture capitalist for $2,000,000. Third, the company went public last year by issuing2,000,000 shares of stock to the public for $24 million. Use this information to fill in thefollowing table: Common shares (par value)____________________ Additional paid-in capital____________________ Retained Earnings ____________________Net Equity $28,500,000

2. A $1,000 face value bond of Acme Inc. pays an annualcoupon, carries a coupon rateof 7.25%, has 31 years to maturity, and sells at a yield to maturity of 6.45%. (a) What interest payments do bondholders receive each year?(b) At what price does the bond sell? (c) What is the bond price if the yield to maturity increases to 8%?

3. A 20 year maturity bond with a coupon rate of 6.5% and face value of $1,000 makes semi-annualcoupon payments. What is the bond’s yield to maturity if the bond is selling for: (a) 900? (b) 1,000?

Explanation / Answer

1. a. Common shares (par value) = (1,000,000 + 500,000 + 2,000,000) x 0.0001 = $350

b. Additional Paid-in Capital = (50,000 + 2,000,000 + 24,000,000) - 350 = $26,049,650

c. Retained Earnings = 28,500,000 - 26,049,650 = $2,450,350

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