Marie Snell Recently Inherited Some Bonds (Face Value $100,000)from Her

question 112

Multiple Choice

Marie Snell recently inherited some bonds (face value $100,000) from her father,and soon thereafter she became engaged to Sam Spade,a University of Florida marketing graduate.Sam wants Marie to cash in the bonds so the two of them can use the money to "live like royalty" for two years in Monte Carlo.The 2 percent annual coupon bonds mature on January 1,2030,and it is now January 1,2010.Interest on these bonds is paid annually on December 31 of each year,and new annual coupon bonds with similar risk and maturity are currently yielding 12 percent.If Marie sells her bonds now and puts the proceeds into an account which pays 10 percent compounded annually,what would be the largest equal annual amounts she could withdraw for two years,beginning today (i.e. ,two payments,the first payment today and the second payment one year from today) ?

• A) $13,255
• B) $29,708
• C) $12,654
• D) $25,305
• E) $14,580

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Definitions:

Retained Earnings

What remains of the company's net earnings after dividend payments to shareholders have been made.

Dividends Payable

A liability on the company's balance sheet that indicates the amount of dividends declared by the board of directors but not yet paid to shareholders.

Additional Paid-in Capital

The amount of money investors pay above the par value of shares, reflecting the excess amount invested by shareholders in the company.

Common Stock

A type of equity security that represents ownership in a corporation, including voting rights and a share of profits through dividends.