Question :
On 1st January, 2009, Carlin Corporation issued $2,400,000 of 5-year, 8 percent bonds at 95; the bonds pay interest semiannually on July 1 and January 1.
By 1st January, 2011, the market rate of interest for bonds of risk similar to those of Carlin Corporation had risen. As a result the market value of these bonds was $2,000,000 on 1st January, 2011-below their carrying value.
Andrea Carlin, president of the company, suggests repurchasing all of these bonds in the open market at the $2,000,000 price. To do so the company may have to issue $2,000,000 (face value) of new 10-year, 11% bonds at par. The president asks you, as controller, "What is the feasibility of my proposed repurchase plan?"
Required:
Purpose a memo to the president in response to her request for advice. The memo should include;
- A discussion of the economic factors that you suppose should be considered for her repurchase proposal. Comment on the relative decrease/ increase in interest expense for Carlin Corporation if a new bond issue is made.
- What is the carrying value of the outstanding Carlin Corporation 5-year bonds on January 1, 2011?