Reference no: EM132790013
Question - Consolidated Transportation Co. is seeking to raise $10 million in financing for a new freight terminal. Construction is set begin on January 1, 2021. You are the head of a consulting advisory team hired by the company to recommend the best financing arrangement for the project. Your team has narrowed down the choices to the following alternatives:
Alternative 1 (Initiation Date: January 1, 2021): Raise the required amount from a new bond issue. The bond will have a face value of $10,882,257.24, a coupon rate of 6% per annum payable semiannually, and a maturity period of 5 years. The market interest rate is 8% per annum.
Alternative 2 (Initiation Date: January 1, 2021): A Canadian construction company has offered to build the freight terminal for a contract price of $14,801,657.79 payable in a one-time lump sum payment at the end of five years. The appropriate market rate implied in this transaction is also 8% per annum, compounded semiannually.
Required - Round all answers to the nearest whole dollar and show all necessary calculations.
i. Determine the book value of the liability associated with the two financing alternatives on January 1, 2021. Support your answers with all necessary calculations and round your answers to the nearest whole dollar.
ii. What is the interest expense associated with each financing alternative for the period ended June 30, 2021? Show your work.
iii. What is the book value of the liability on June 30, 2021 for each financing alternative. Show your work.
iv. Which financing alternative has a lower interest expense for the year ended December 31, 2021? Support your answers with all necessary calculations.
v. What is the book value of the liability at the end of year 1, December 31, 2021 for each financing alternative. Show your work.
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