Pool Corporation, Inc., is the world's largest wholesale distributor of swimming pool supplies and equipment. It...
Pool Corporation, Inc., is the world's largest wholesale distributor of swimming pool supplies and equipment. It is a publicly traded corporation that trades on the NASDAQ exchange. The majority of Pool's customers are small, family-owned businesses. Assume that Pool borrowed $750,000,000 on January 1 of this year, and that the coupon rate is 5 percent. At the time of the borrowing, the annual market rate of interest was 4 percent. The debt matures in 10 years, and Pool makes interest payments semiannually on June 30 and December 31. (FV of $1, PV of $1, FVA of $1, and PVA of $1)
1. What was the issue price on January 1 of this year?
2. What amount of interest expense should be recorded on June 30 and December 31 of this year?
3. What amount of cash interest should be paid on June 30 and December 31 of this year?
4. What is the book value of the bonds on June 30 and December 31 of this year?
Homework Answers
1. Issue price on January 1 of this year is as calculated below:
| Table value is based on: | |||
| n= 20 | |||
| i= 2% | |||
| Cash Flow | Table Value | Amount | Present Value |
| Par (maturity value) | 0.6730 | 750,000,000 | 504,728,500 |
| Interest (annuity) | 16.3514 | 18,750,000 | 306,589,375 |
| Price of Bond | 811,317,875 |
2. Amount of interest expense should be recorded on June 30 and December 31 of this year is:
June 30 16,226,358
Dec 31 16,175,885
3. Amount of cash interest should be paid on June 30 and December 31 of this year is:
June 30 18,750,000
Dec 31 18,750,000
4. Book value of the bonds on June 30 and December 31 of this year
June 30 808,794,233
Dec 31 806,220,117
Working to calculate Interest Expense, Interest paid and Book Value is:
| A | B | C | D | E | |
| Semiannual Interest Period | Interest Paid | Bond Interest Expense | Premium Amortization | Unamortized premium | Carrying Value at end of period |
| 75,000,000*5%*6/12 | E*4%*6/12 | A-B | D-C | E-C | |
| 0 | $61,317,875 | $811,317,875 | |||
| 1 | $18,750,000 | $16,226,358 | $2,523,642 | $58,794,233 | $808,794,233 |
| 2 | $18,750,000 | $16,175,885 | $2,574,115 | $56,220,117 | $806,220,117 |
| 3 | $18,750,000 | $16,124,402 | $2,625,598 | $53,594,520 | $803,594,520 |
| 4 | $18,750,000 | $16,071,890 | $2,678,110 | $50,916,410 | $800,916,410 |
| 5 | $18,750,000 | $16,018,328 | $2,731,672 | $48,184,738 | $798,184,738 |
| 6 | $18,750,000 | $15,963,695 | $2,786,305 | $45,398,433 | $795,398,433 |
| 7 | $18,750,000 | $15,907,969 | $2,842,031 | $42,556,402 | $792,556,402 |
| 8 | $18,750,000 | $15,851,128 | $2,898,872 | $39,657,530 | $789,657,530 |
| 9 | $18,750,000 | $15,793,151 | $2,956,849 | $36,700,680 | $786,700,680 |
| 10 | $18,750,000 | $15,734,014 | $3,015,986 | $33,684,694 | $783,684,694 |
| 11 | $18,750,000 | $15,673,694 | $3,076,306 | $30,608,388 | $780,608,388 |
| 12 | $18,750,000 | $15,612,168 | $3,137,832 | $27,470,555 | $777,470,555 |
| 13 | $18,750,000 | $15,549,411 | $3,200,589 | $24,269,967 | $774,269,967 |
| 14 | $18,750,000 | $15,485,399 | $3,264,601 | $21,005,366 | $771,005,366 |
| 15 | $18,750,000 | $15,420,107 | $3,329,893 | $17,675,473 | $767,675,473 |
| 16 | $18,750,000 | $15,353,509 | $3,396,491 | $14,278,983 | $764,278,983 |
| 17 | $18,750,000 | $15,285,580 | $3,464,420 | $10,814,562 | $760,814,562 |
| 18 | $18,750,000 | $15,216,291 | $3,533,709 | $7,280,854 | $757,280,854 |
| 19 | $18,750,000 | $15,145,617 | $3,604,383 | $3,676,471 | $753,676,471 |
| 20 | $18,750,000 | $15,073,529 | $3,676,471 | ($0) | $750,000,000 |
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