Question: The following information was taken from the financial statements of ALZA Corporation.
On July 28, 2000, ALZA completed a private offering of the 3% Zero Coupon Convertible Subordinated Debentures, which were issued at a price of $551.26 per $1,000 principal amount at maturity. At December 29, 2002, the outstanding 3% Debentures had a total principal amount at maturity of $1.0 billion with a yield to maturity of 3% per annum, computed on a semiannual bond equivalent basis. . . . At December 29, 2002, the fair value based on quoted market value of the 3% Debentures was $813 million. . . .
Required:
1. ALZA issued zero coupon debentures with a total maturity value of $1.0 billion at a price of $551.26 per $1,000 principal amount at maturity. How much cash did the company receive when it issued these debentures?
2. The debentures mature in 20 years from the date of issuance, but no interest payments are made until maturity. Show that the issue price of $551.26 gives investors a 3% yield to maturity.
3. Suppose that the debentures were issued on January 1, 2000, instead of July 28, 2000. Reproduce the journal entries ALZA would record in 2000 for the debentures. For each cash entry, indicate whether the cash increase or decrease represents an operating, investing, or financing activity.
4. Explain why the debentures have a market value of $813 million at the end of 2002, almost $300 million more than the 2000 issue price.