On a Debt of $10,000,interest Is Paid Semi-Annually at J₂

question 64

Multiple Choice

On a debt of $10,000,interest is paid semi-annually at j₂ = 10% and semi-annual deposits are made into a sinking fund to retire the debt at the end of 5 years.The sinking fund earns interest at j₁₂ = 6%.What is the semi-annual expense of the debt?

• A)$2382.13
• B)$1370.79
• C)$2324.87
• D)$870.79

---

Definitions:

Cost of Debt

The interest rate a company pays on its borrowings, often expressed as a percentage.

Cost of Equity

The return a firm theoretically pays to its equity investors, i.e., shareholders, to compensate for the risk they undertake by investing their capital.

Separate Entities

A principle in accounting where a business is considered a separate entity from its owners or shareholders, ensuring that business transactions are kept distinct from the personal transactions of owners.

Preferred Stock

A security that is similar to bonds in some respects and to common stock in others. Preferred dividends are similar to interest payments on bonds in that they are fixed in amount and generally must be paid before common stock dividends can be paid. If the preferred dividend is not earned, the directors can omit it without throwing the company into bankruptcy.