Pearl Ltd issues $8 million in 5-year debentures that pay interest every 6 months at a coupon rate of 12 per cent per annum.The required market rate of return is 16 per cent per annum.What is the issue price of the debentures (rounded to the nearest dollar)?
A) $6,926,387
B) $8,000,000
C) $9,177,614
D) $8,673,978
E) None of the given answers.

Question

Quizplus · Accepted Answer

The issue price of the debentures can be calculated using the present value of the cash flows. The cash flows consist of semi-annual interest payments of $480,000 ($8 million x 12% x 6/12) and the repayment of the principal of $8 million at the end of 5 years. Using a financial calculator or excel, the present value of these cash flows at a discount rate of 8% (half of the required market rate of return) is $6,926,387. This is the issue price of the debentures, rounded to the nearest dollar.

Pearl Ltd Issues $8 Million in 5-Year Debentures That Pay