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%