Final answer:
Wine Corporation will realize $5,262,408 from the issuance of its 8%, 10-year bonds with a par value of $6,000,000, when the market interest rate is 10%.
Step-by-step explanation:
When Wine Corporation issues its bonds at a different interest rate from the market rate, the bonds will not sell at their par value. Instead, the bonds will be sold at a discount or a premium to equate the market interest rate with the interest payments and maturity value of the bonds. To calculate the present value of the bonds, we must discount the future cash flows, which include annual interest payments and the principal amount at maturity.
First, we find the present value of the annual interest payments that Wine Corporation will make, which is $6,000,000 (the par value) multiplied by 8% (the coupon rate), resulting in annual payments of $480,000. The present value of these payments, using the market interest rate of 10% for an ordinary annuity for 10 periods, is $480,000 multiplied by the annuity factor of 6.1446, which equals $2,949,408.
Second, we calculate the present value of the principal to be paid at maturity, which is $6,000,000 (the par value) times the present value factor of 0.3855 at 10% for 10 periods. This equals $2,313,000.
Adding the present value of the interest payments and the principal gives us the total amount Wine Corporation will realize from the sale of bonds: $2,949,408 (interest) + $2,313,000 (principal) = $5,262,408. Hence, the correct answer is b. $5,262,408.