Larkins is planning to issue debentures with a face value of $2,000,000 on September 1, 2011. The debentures mature in 10 years and have a face interest rate of 8 percent that is paid semiannually on March 1 and September 1 of each year. Larkins is uncertain about what the market interest rate will be on those dates and has projected the following possibilities:
Situation 1: The market rate of interest is 9 percent.
Situation 2: The market rate of interest is 7 percent.
Situation 3: The market rate of interest is 8 percent.
A. How much cash will Larkins receive from the debentures for each interest rate?
B. What is the interest expense for the first year for each of the market interest rates?
C. What annual cash outflows will occur for each of the market interest rates?
D. How did the carrying value change each year under each scenario?
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