Question

You are the financial planner for Johnson Controls. Assume last year's profits were $700,000.

The board of directors decided to forgo dividends to stockholders and retire high-interest outstanding bonds that were issued 5 years ago at a face value of $1,250,000. You have been asked to invest the profits in a bank. The board must know how much money you will need from the profits earned to retire the bonds in 10 years. Bank A pays 6% Compounded
quarterly, and Bank B pays 61.5% compounded annually. Which bank would you recommend, and how much of the company's profit should be placed in the bank? If you recommended that the remaining money not be distributed to stockholders but be placed in Bank B, how much would the remaining money be worth in 10 years? Show your work.

Answer 1

To retire the bonds, calculate the future value of the profits placed in Bank A and Bank B. If Bank B offers a higher return, place the remaining money in Bank B and calculate its worth in 10 years.

Step-by-step explanation:

To calculate how much money is needed to retire the bonds in 10 years, we need to consider the interest rates offered by Bank A and Bank B. Bank A pays 6% compounded quarterly, while Bank B pays 61.5% compounded annually. To determine which bank to recommend, we can calculate the future value of the profits placed in each bank after 10 years.

Bank A: Future Value = Principal * (1 + interest rate/n)^(n*t)

Bank B: Future Value = Principal * (1 + interest rate)^t

By comparing the future values, we can determine which bank offers a higher return. If Bank B offers a higher return, the remaining money can be placed in Bank B and we can calculate its worth in 10 years using the future value formula.