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The initial proceeds per bond, the size of the issue, the initial maturity of the bond, and the years remaining to maturity are shown in the following table for a number of bonds. In each case, the fi rm is in the 40 percent tax bracket, and the bond has a $1,000 par value.
Bond
Proceeds per Bond
Size of Issue
Initial Maturity of Bond
Years Remaining to Maturity
A
$ 985
10,000 bonds
20 years
15 years
B
1,025
20,000
25
16
C
1,000
22,500
12
9
D
960
5,000
15
E
1,035
10,000
30
a. Indicate whether each bond was sold at a discount, at a premium, or at its par value.
b. Determine the total discount or premium for each issue.
c. Determine the annual amount of discount or premium amortized for each bond.
d. Calculate the unamortized discount or premium for each bond.
e. Determine the after-tax cash flow from the unamortized discount associated with the retirement now of each of these bonds, using the values developed in part (d).
Calculating Break-Even [LO3] In each of the following cases, calculate the accounting break-even and the cash break-even points. Ignore any tax effects in calculating the cash break-even.
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