Question

Suppose your company needs to raise $40 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 5.7 percent, and you’re evaluating two issue alternatives: a 5.7 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 21 percent. a. How many of the coupon bonds would you need to issue to raise the $40 million? How many of the zeroes would you need to issue? (Do not round intermediate calculations and enter your answers in bonds, not millions of bonds, rounded to 2 decimal places, e.g., 1,234,567.89.) b. In 20 years, what will your company’s repayment be if you issue the coupon bonds? What if you issue zeroes? (Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.) c. Assume that the IRS amortization rules apply for the zero coupon bonds. Calculate the firm’s aftertax cash outflows for the first year under the two different scenarios. (Enter a cash outflow as a negative value and a cash inflow as a positive value. Do not round intermediate calculations and enter your answers in dollars, not millions of dollars, rounded to the nearest whole number, e.g., 1,234,567.)

Answer 1