Question

Metlock, Inc. is considering these two alternatives to finance its construction of a new $1.28 million plant: (1) Issuance of 128,000 shares of common stock at the market price of $10 per share. (2) Issuance of $1.28 million, 8% bonds at face value.If the income before interest and tax is$1,515,000 for issue stock and issue bond. Calculate expenses from bonds.

Answer 1

Interest expenses from issuing bond = $102,400

Step-by-step explanation:

Generally, Bond creates interest expenses for a company. Issuing stock will not create any interest. The tax is low due to paying interest when issuing bond. Since the bond does not have any specific maturity period, the interest expense will be for 1 year only.

Interest expense = The value of bond × Annual interest rate × number of periods

Given,

The value of bond = $1.28 million = $1,280,000

Annual interest rate = 8% = 0.08

Number of periods = 1

Therefore, interest expense = $1,280,000 × 0.08 × 1 = $102,400