Log out Go to App
Go to App

Learning Materials

Features

Discover

Chapter 5: Q15DQ (page 524)

Explain how the zero-coupon rate bond provides return to the investor. What are the advantages to the corporation? (LO16-2)

Short Answer

Expert verified

The zero-coupon rate bonds are issued at a deep discount from face value, and the difference between them is the return for investors.

Also, the company does not require to pay interest on such a variety of bonds, and such a bond also smoothens the corporation’s cash inflow.

Step by step solution

01

Return generation for investors

The return generated by the investors in zero-coupon-rated bonds is the difference between the cost incurred by the investor and the face value received at the bond’s maturity.

02

Advantages of zero-coupon rate bond

  • The corporations are not required to pay interest on a zero-coupon rate bond.
  • Zero-coupon-rated bonds facilitate the immediate inflow of cash and do not require any outflow before maturity.
  • The corporations may amortize the difference between initial bond price and maturity value throughout the life of the bond.

Unlock Step-by-Step Solutions & Ace Your Exams!

  • Full Textbook Solutions

    Get detailed explanations and key concepts

  • Unlimited Al creation

    Al flashcards, explanations, exams and more...

  • Ads-free access

    To over 500 millions flashcards

  • Money-back guarantee

    We refund you if you fail your exam.

Start your free trial

Over 30 million students worldwide already upgrade their learning with Vaia!

One App. One Place for Learning.

All the tools & learning materials you need for study success - in one app.

Get started for free

Most popular questions from this chapter

If a company were looking for capital by way of a private placement, where would it look for funds?

What is the difference between the following yields: coupon rate, current yield, and yield to maturity? (LO16-2)

Kevin’s Bacon Company Inc. has earnings of \(9 million with 2,100,000 shares outstanding before a public distribution. Seven hundred thousand shares will be included in the sale, of which 400,000 are new corporate shares, and 300,000 are shares currently owned by Ann Fry, the founder and CEO. The 300,000 shares that Ann is selling are referred to as a secondary offering, and all proceeds will go to her.

The net price from the offering will be \)16.50, and the corporate proceeds are expected to produce $1.8 million in corporate earnings.

a. What were the corporation’s earnings per share before the offering?

b. What are the corporation’s earnings per share expected to be after the offering?

Tyson Iron Works is about to go public. It currently has after-tax earnings of \(4,400,000, and 4,200,000 shares are owned by the present stockholders. The new public issue will represent 500,000 new shares. The new shares will be priced to the public at \)25 per share with a 3 percent spread on the offering price. There will also be $280,000 in out-of-pocket costs to the corporation.

c. Compute the earnings per share immediately after the stock issue.

Question: The trustee in the bankruptcy settlement for Titanic Boat Co. lists the following book values and liquidation values for the assets of the corporation. Liabilities and stockholders’ claims are also shown.

Assets

Book value

Liquidation value

Accounts receivables

\(1,400,000

\)1,200,000

Inventory

\(1,800,000

\)900,000

Machinery and equipment

\(1,100,000

\)600,000

Building and plant

\(4,200,000

\)2,500,000

Total assets

\(8,500,000

\)5,200,000

Liabilities and stockholder’s claims

Liabilities

Accounts payable

\(2,800,000

First lien, secured by machinery and equipment

\)900,000

Senior unsecured debt

\(2,200,000

Subordinated debenture

\)1,700,000

Total liabilities

\(7,600,000

Stockholder’s claims

Preferred stock

\)250,000

Common stock

\(650,000

Total stockholder’s claims

\)900,000

Total liabilities and stockholder’s claims

$8,500,000

g. List the remaining claims (unsatisfied secured and unsecured) and make an initial allocation and final allocation similar to that shown in Table 16A-4. Subordinated debenture holders may keep the balance after full payment is made to senior debt holders.
See all solutions

Recommended explanations on Business Studies Textbooks

Operational Management

Read Explanation

Strategic Direction

Read Explanation

Managers

Read Explanation

Intermediate Accounting

Read Explanation

Influences On Business

Read Explanation

Business Development

Read Explanation
View all explanations

What do you think about this solution?

We value your feedback to improve our textbook solutions.

Study anywhere. Anytime. Across all devices.

Sign-up for free