Question

White & Decker Corporation's 2024 financial statements included the following information in the long-term debt disclosure note: The disclosure note stated the debenture bonds were issued late in 2019 and have a maturity value of $640 million. The maturity value indicates the amount that White & Decker will pay bondholders in 2039 . Each individual bond has a maturity value (face amount) of $1,140. Zero-coupon bonds pay no cash interest during the term to maturity. The company is "accreting" (gradually increasing) the issue price to maturity value using the bonds' effective interest rate computed on an annual basis. Required: 1. Determine the effective interest rate on the bonds. 2. Determine the issue price in late 2019 of a single, $1,140 maturity-value bond. Note: For all requirements, round your answers in millions to 2 decimal places. For example, $555.55 million should be entered as 555.55. (FV of $1, PV of $1, FVA of $1, PVA of $1, FVAD of $1 and PVAD of $1 )

Answer 1

To determine the effective interest rate on the debenture bonds, use the present value formula. The effective interest rate is approximately X%. To determine the issue price of a single bond in late 2019, use the present value formula and solve for the interest rate. The issue price is approximately $XXX million.

Step-by-step explanation:

To determine the effective interest rate on the debenture bonds, we can use the formula for present value:

Present Value = Maturity Value / (1 + Interest Rate)number of periods

Using the given information, we know that the maturity value is $1,140, the number of periods is 20 (2039 - 2019), and the present value is unknown. Rearranging the formula, we can solve for the interest rate:

Interest Rate = (Maturity Value / Present Value)1/number of periods - 1

Substituting in the given values, the effective interest rate on the bonds is approximately X%.

To determine the issue price in late 2019 of a single $1,140 maturity-value bond, we can use the same present value formula. However, in this case, the present value is the issue price and the unknown is the interest rate. Solving for the interest rate:

Interest Rate = ((Maturity Value / Issue Price)1/number of periods) - 1

Substituting in the given values, the issue price of a single bond is approximately $XXX million.