Question

The balance sheet as of December 31, 2015, for Boyton Sons follows:


The company needs capital to finance operations and purchase new equipment. Boyton is not certain how much money it will need and is considering one of the following three-year notes payable. Each note would mature on January 1, 2019.
(A) Face value = $50,000 Stated interest rate = 0% Proceeds = $37,566
(B) Face value = $50,000 Stated interest rate = 10%* Proceeds = $50,000
(C) Face value = $50,000 Stated interest rate = 6%* Proceeds = $45,027
*Interest paid annually.

REQUIRED:
a. Determine the effective interest rate of each note.
b. Compute the amounts that would complete the following table:


c. Assume that Boyton can earn a 12 percent return on the borrowed money and that it reinvests all interest that it earns. Compute the annual income (return – Interest expense) generated from each of the three notes.
d. Compute the amounts that would complete the following chart.


e. Discuss some of the trade-offs involved in choosing among the three notes.


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  • CreatedAugust 19, 2014
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