Question

Suppose your company needs to raise $36 million and you want to issue 20-year bonds for this purpose. Assume the required return on your bond issue will be 8.5 percent, and you’re evaluating two issue alternatives: an 8.5 percent semiannual coupon bond and a zero coupon bond. Your company’s tax rate is 35 percent. Both bonds would have a face value of $1,000.
  
a. How many of the coupon bonds would you need to issue to raise the $36 million? (Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Number of coupon bonds            

How many of the zeroes would you need to issue? (Do not round intermediate calculations and round your answer to 2 decimal places, e.g., 32.16.)

Number of zero coupon bonds            

b. In 20 years, what will your company’s repayment be if you issue the coupon bonds? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Coupon bonds repayment            $

What if you issue the zeroes? (Enter your answer in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answer to the nearest whole number, e.g., 32.)

Zero coupon bonds repayment            $

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. (Input a cash outflow as a negative value and a cash inflow as a positive value. Enter your answers in dollars, not millions of dollars, e.g., 1,234,567. Do not round intermediate calculations and round your answers to 2 decimal places, e.g., 32.16.)

Coupon bond cash flow	$
Zero coupon bond cash flow	$

Answer 1

a	Number of coupon bonds	36,000	=36000000/1000
	Number of zero coupon bonds	190,258.93	=36000000/PV(8.5%/2,20*2,,1000)*-1
b	Coupon bonds repayment	$    37,530,000	=36000*1000+36000000*8.5%/2
	Zeroes repayment	$ 190,258,930	=190258.93*1000
c	Coupon bonds	-$1,989,000.00	=-36000000*8.5%*(1-35%)
	Zero coupon bonds	$ 1,093,758.75	=36000000*((1+8.5%/2)^2-1)*35%