Question

Suppose your company needs to raise $53 million and you want to issue 25-year bonds for this purpose. Assume the required return on your bond issue will be 4.6 percent, and you’re evaluating two issue alternatives: A semiannual coupon bond with a coupon rate of 4.6 percent and a zero coupon bond. Your company’s tax rate is 24 percent. Both bonds will have a par value of $2,000. a-1. How many of the coupon bonds would you need to issue to raise the $53 million? a-2. How many of the zeroes would you need to issue? b-1. In 25 years, what will your company’s repayment be if you issue the coupon bonds? b-2. What if you issue the zeroes? c. Calculate the aftertax cash flows for the first year for each bond.

Answer #1

a-1 | Number of coupon bonds | 26,500 | =53000000/2000 |

a-2 | Number of zero coupopn bonds | 82,609.04 | =53000000/PV(4.6%/2,25*2,,2000)*-1 |

b-1 | Coupon bonds repayment | $ 54,219,000 | =26500*2000+53000000*4.6%/2 |

b-2 | Zeroes repayment | $ 165,218,080 | =82609.04*2000 |

c | Coupon bonds | -$1,852,880.00 | =-53000000*4.6%*(1-24%) |

Zero coupon bonds | $ 591,848.88 | =53000000*((1+4.6%/2)^2-1)*24% |

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