In FINANCIAL STATEMENT ANALYSIS page 507, question 2 (Zero-coupon bonds) The Null Company issued a zero-coupon bond on January 1, 2000, due December 31, 2004. The face value of the bond was $ 100 000. The bond was issued at an effective rate of 12% (compounded annually). The cash proceeds of the bond is 56 742 My questions are for the table in B. 1/ How does the book get the INTEREST EXPENSE as below? 2000 6 809 2001 7 626 2002 8 541 2003 9 566 2004 10 714 2/ How does it calculate the TIMES INTEREST EARNED as below? 2000 7.34 2001 6.56 2002 5.85 2003 5.23 2004 4.67
I don’t have the book, so I can only answer Q1. The company borrowed 56,742 on 1/1/00. They owe 12% interest on it. 56,742*.12= 6,809 This is a zero, so the interest is acrued, but not paid. So at the start of year two they owe 56,742+6,809=63,551 take 12% interest on that to get 7,626 and so on. For the second q, times interest earned is (something)/interest looking at 2000 the number is 7.34 which means that x/6809=7.34 so x=50,000 Do they give you EBIT or some other number as 50,000? (There are several ways to define this ratio)
You are so right ! EBIT is 50 000 every year.